SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended August 31, 1995
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-17932
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Micron Electronics, Inc.
(Exact name of registrant as specified in charter)
Minnesota 41-1404301
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(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
900 East Karcher Road, Nampa, Idaho 83687
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (208)465-3434
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 par value per share The Nasdaq Stock Market
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Securities registered pursuant to section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Company's Common Stock
on August 31, 1995, as reported by The Nasdaq Stock Market, was approximately
$234.4 billion. Shares of Common Stock held by each officer and director
and by each person who owns 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of outstanding shares of the registrant's Common Stock on
August 31, 1995 was 91,431,392.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1995 Annual Meeting
of Shareholders to be held on November 20, 1995 are incorporated by reference
to Part III of this Annual Report on Form 10-K.
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PART I
Item 1. Business
Micron Electronics, Inc. ( "MEI" or the "Company") manufactures
electronic products for a wide range of computing and digital applications.
The Company develops, markets, manufactures, sells and supports personal
computer ("PC") systems for consumer, government and business use, provides
contract manufacturing services to original equipment manufacturers
("OEMs"), maintains a component recovery operation and assembles and
markets peripheral add-on memory products. The Company was originally
incorporated in May, 1981 under the name of ZEOS International, Ltd.
("ZEOS"). On April 7, 1995, Micron Computer, Inc. ("MCI") and Micron
Custom Manufacturing Services, Inc. ("MCMS"), merged with and into ZEOS
International, Ltd. MCI and MCMS were formed in late 1991 and early 1992,
respectively, as subsidiaries of Micron Technology, Inc. ("MTI"). Pursuant
to the terms of the merger, ZEOS issued approximately 82.5 million shares
of its common stock in exchange for all of the outstanding shares of MCI
and MCMS, and the name of the combined company was changed to Micron
Electronics, Inc. The merger resulted in a change of control of
approximately 89% of ZEOS whereby, assuming exercise of all outstanding
options, (a) MTI owned an approximate 79% interest in MEI, and (b) the
other shareholders of MCI and MCMS owned an approximate 10% interest in
MEI. At August 31, 1995, the Company was approximately 80% owned by MTI.
The Company's headquarters are in Nampa, Idaho.
Personal Computer Systems
MEI develops, markets, manufactures, sells and supports a broad line of
memory intensive, high performance PC systems under the Micron(Trademark)
and ZEOS(Trademark) brand names. Micron brand PC systems are manufactured,
sold and supported primarily at the Company's Nampa, Idaho facility. ZEOS
brand PC systems are manufactured, sold and supported at the Company's
Minneapolis, Minnesota facilities.
Products
MEI seeks to provide end-users with memory intensive PC systems that
include the latest hardware and software features commercially available in
the PC marketplace at competitive prices. MEI currently utilizes
Pentium(Registered Trademark) and 486 microprocessors from Intel
Corporation ("Intel") for virtually all of its PC systems. The Company's
PC systems are custom-configured with a variety of memory and storage
capacities, as well as other options, as specified by the customer and are
available with a variety of operating and applications software. MEI offers
a variety of peripheral products with its PC systems, including monitors,
modems, graphics cards, accelerators and CD-ROM units.
As of August 31, 1995, the Company's PC product lines generally
included: the Micron Millennia(Trademark), targeted for high-end business
users; the Micron PowerStation(Trademark), targeted for general business
users; the Micron Home MPC(Trademark), targeted for the home office and
general consumer; the Micron PowerServer(Trademark), a business network
server; the ZEOS Pantera(Trademark), targeted for mainstream business; and
the ZEOS Meridian(Trademark), a portable notebook computer.
The Company continues to evaluate its product strategies, including (i)
the coordination of Micron and ZEOS brand marketing strategies, (ii) the
sharing of Micron and ZEOS research and development efforts, and (iii) the
coordination and potential integration of Micron and ZEOS product lines.
Actions taken in this regard could result in a number of adverse
consequences, including, but not limited to, confusion in the marketplace
regarding the Company's product lines, a decrease in the Company's unit
sales and the recognition of unanticipated expenses, which could have a
material adverse effect on the Company's results of operations.
The Company's approach to developing new products is focused primarily
on evaluating new technological developments and changing consumer
preferences and on incorporating such developments and preferences into its
product lines. MEI works closely with its suppliers to evaluate the latest
developments in PC-related technology and specifications. The Company's
engineering and marketing staffs then determine which configurations best
respond to customer preferences. MEI has undertaken efforts specifically
to produce systems that will compete favorably in industry wide
competitions judging performance and value. These competitions typically
call for system configurations consistent with the latest trends in PC
consumer demand.
The Company does not maintain a large in-house product research
and development staff. In February 1992, ZEOS acquired PC Tech,
Inc. to design high performance motherboards and integrated circuits
for ZEOS' desktop systems and to
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aid in the evaluation of new technology and its incorporation into ZEOS'
product lines. Components designed by the PC Tech group are geared towards
providing performance enhancements and cost reductions in PC architecture.
Use of enhanced components designed by the PC Tech group permit broader
feature sets and increased performance without the need for add-in cards.
To maintain a competitive position in the PC industry, the Company must
introduce new products and features that address the needs and preferences
of its target markets. The PC industry is characterized by short product
life cycles resulting from rapid changes in technology and consumer
preferences and declining product prices. There can be no assurance that
the introduction of new products or features by the Company or its
competitors will not materially and adversely affect the sale of the
existing products of the Company, or that the Company will be able to adapt
to future product changes in the PC industry.
Marketing and Sales
The Company's direct marketing approach is directed toward PC users who
tend to evaluate products based on performance, price, quality, support and
service. The Company's customer base is comprised primarily of small to
medium sized businesses as well as individuals purchasing for home use. In
addition, the Company sells its products directly to certain larger volume
purchasers and through strategic sales relationships with companies
having large government procurement contracts. The Company's participation
in large government procurement contracts generally may be terminated at
any time by the companies holding the contracts. Moreover, the pricing and
terms of any such procurement contracts with government agencies are
generally subject to renegotiation or termination by such agencies. The
Company also markets its PC systems through direct mail campaigns to
existing and prospective customers and sells a limited number of its PCs
through three factory outlet and retail stores located in Minnesota and
Idaho.
Under its direct marketing approach, MEI markets its PC systems
primarily by strategically placing advertisements and attempting to win
awards in personal computer trade publications. Through direct marketing,
MEI is able to avoid dealer markups and inventory costs typically
experienced in retail marketing and can maintain close contact with its
target market. Consumers seeking high performance systems at reasonable
prices have historically referenced computer trade magazines to evaluate
the type of system and configurations best suited to their particular
needs. MEI believes that consumer interest in its PC systems has been
significantly enhanced and brand name recognition of the Company's products
has been increased by the receipt of numerous awards for overall
performance, price and reliability. In the event that the Company is
unsuccessful in receiving such awards in the future, consumer interest in
its PC systems could decline materially.
Direct sales orders are received primarily via telephone by Company
sales representatives who review system configuration compatibility and
current pricing. Most customers order custom-configured systems with
varying feature sets differentiated by microprocessor type and speed, hard
drive capacity, memory, monitor size and resolution and bundled software,
as well as other features. MEI offers its customers a variety of payment
alternatives, including lease financing and its own private label credit
cards. Commercial customers may also be offered payment terms.
Levels of unfilled orders for PC systems fluctuate depending upon
demand for certain products or production delays. Customers frequently
change delivery schedules and orders depending on market conditions and
other reasons. Customers are not billed by the Company until their order is
shipped, and unfilled orders can be, and sometimes are, canceled by the
customer prior to shipment. As of August 31, 1995, MEI had unfilled orders
for PC systems of approximately $46.3 million as compared to combined MCI
and ZEOS unfilled orders for PC systems of $24.3 million as of September 1,
1994. MEI anticipates that substantially all of the unfilled orders as of
August 31, 1995, other than canceled orders, will be shipped within 30
days. Due to (i) customers ability to cancel or reschedule orders without
penalty, (ii) industry seasonality (especially the Christmas buying
season), and (iii) other customer buying patterns experienced by the
Company, MEI does not believe that unfilled orders are a meaningful
indicator of future sales.
The computer industry generally has been subject to seasonality and to
significant quarterly and annual fluctuations in operating results.
Fluctuations can result from a wide variety of factors affecting the
Company and its competitors. These factors include new product
developments or introductions, availability of components, changes in
product mix and pricing and product reviews and other media coverage. The
Company's business is also sensitive to the spending patterns of its
customers which are affected by economic conditions. In recent periods,
the Company's sales to the government sector have increased. Accordingly,
the Company expects that future sales may be impacted by the budgetary
spending practices of the government sector. There can be no assurance
that the Company will not experience fluctuations in operating results in
the future.
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PC Product Warranties and Technical Support
MEI believes that its PC product warranties and technical support
programs are essential to achieving customer satisfaction. The key elements
of the Company's PC product warranties and technical support programs are
as follows:
30-Day Money Back Guarantee. Customers generally may return products
purchased from the Company within 30 days after shipment for a full refund
of the purchase price.
Limited Warranty. MEI generally provides a one-year limited warranty on
hardware which covers repairs or replacements for defects in either
workmanship or materials. Technicians are specifically trained to assist
customers via telephone support in the installation of replacement parts.
On-site service is provided by third-party service suppliers. Customers
have the option to purchase an extended limited warranty from the Company
and extended on-site service from a third-party.
Technical Support. MEI offers its customers telephone access to
technical support services (toll-free in the United States). The Company's
technical and customer support representatives respond to a variety of
telephone inquiries from customers, including questions concerning the
Company's product offerings, customer order status and post-installation
hardware and software issues. Many customer inquiries are resolved over
the telephone without the need to repair or replace system components.
When repairs are necessary, the Company ships the replacement part and
advises the customers over the telephone how to install it. Customers may
also elect to ship computers directly to the Company for repair. The
Company also offers technical support services via the Internet through the
Company's home page on the World Wide Web and by means of an electronic
bulletin board system. These services enable a customer to access system-
specific information and recent software updates for many of the software
programs and drivers included with the Company's systems.
Manufacturing
MEI's manufacturing process is designed to provide custom-configured
products to its customers, and includes assembling components, loading
software and performing quality control tests on each system prior to
shipment. The Company's PC systems are assembled to customer
specifications. Only a limited number of the most popular PC system
configurations are manufactured in advance of customer orders. Parts and
components required for each customer order are selected from inventory and
are prepared for assembly into the customized PC system. While custom
assembly is advantageous to MEI's customers, the Company is unable to
achieve the manufacturing efficiencies normally associated with mass
production of standardized products.
The Company's desktop PC systems are assembled on the Company's
production lines while the Company's notebook PC systems are primarily
assembled and tested by a third party supplier prior to delivery to MEI for
custom configuration. During assembly, MEI's PC systems are downloaded with
software, powered up and subjected to certain diagnostic tests including
evaluation of each system's functionality and quality. When the assembly
process is completed, the PC systems undergo a final inspection after which
they are packaged and made available for shipment to customers.
MEI relies on third-party suppliers for its PC system components. The
Company seeks to identify suppliers which can provide state-of-the-art
technology, product quality and prompt delivery at a competitive price. MEI
purchases substantially all of its components and subassemblies from
suppliers on a purchase order basis and generally does not maintain long-
term supply arrangements with its suppliers. Although the Company attempts
to use standard components and subassemblies available from multiple
suppliers, certain of its components and subassemblies are available only
from sole suppliers. Microprocessors used in the Company's PC systems are
supplied exclusively by Intel. Substantially all of the RAM components
used in the Company's PC systems are supplied by MTI and the Company
expects to continue to depend on MTI as a source of random access memory
("RAM") components. In addition, the Meridian line of ZEOS notebook
computers is currently obtained from a single third party manufacturer.
Although most other components and subassemblies used by MEI are currently
available from multiple sources, the Company has from time to time
experienced shortages in the components and subassemblies used to produce
its PC systems. Any supply interruption for any of the components and
subassemblies currently obtained from a single source, including any
reduction in the availability or increase in the prices of RAM components
purchased from MTI, or the unavailability of any of the other components
and subassemblies used by MEI to produce its PC systems, could result in
production delays and adversely affect the Company's sales and
profitability.
<PAGE>
Competition
The PC industry is highly competitive and has been characterized by
intense pricing pressure, rapid technological advances in hardware and
software, frequent introduction of new products and low gross margins.
Competitive factors include price, performance, variety of products
offered, availability of peripherals and software, marketing and sales
capabilities, service and support. The Company competes with a number of
PC manufacturers which sell their products primarily through direct
marketing channels, including Dell Computer Corporation, Inc. and Gateway
2000, Inc. The Company also competes with PC manufacturers, such as
International Business Machines Corporation ("IBM"), Compaq Computer
Corporation, Packard Bell Electronics, Inc. and Apple Computer, Inc., which
have traditionally sold their products through national and regional
distributors, dealers and value-added resellers, retail stores and the PC
manufacturers' direct sales forces. In addition, MEI competes with smaller
companies which compete in local markets primarily on the basis of price.
Many of the Company's competitors have substantially greater financial,
marketing, manufacturing and technological resources, greater purchasing
power, broader product lines, larger installed customer bases and greater
brand name recognition than MEI. There can be no assurance that MEI will be
able to compete successfully in the future in the PC industry.
Contract Manufacturing
Operations
MEI's wholly owned subsidiary, Micron Custom Manufacturing Services,
Inc. ("MCMS"), is a contract manufacturing operation specializing in the
manufacture of custom, complex printed circuit board assemblies. The
manufacture of electronic products has become increasingly sophisticated
and complex and requires substantial capital investment. In response, many
original equipment manufacturers ("OEMs") are adopting manufacturing
outsourcing strategies and relying on manufacturing specialists to support
their production needs. OEMs use contract manufacturers to gain access to
leading manufacturing expertise, reduce time to market, enhance their
financial flexibility and improve inventory management. MCMS's contract
manufacturing operation consists of assembling and testing complex printed
circuit boards and memory modules and "box build" final product assembly
services. In addition to assembly and test, the Company offers a full
range of turnkey manufacturing services, including design lay-out and
product engineering, materials procurement, inventory management, quality
assurance and just-in-time delivery.
MCMS uses numerous suppliers for the electronic components and
materials, including RAM components, used in its contract manufacturing
operations. In fiscal 1995 and fiscal 1994, MCMS purchased approximately
41% and 58%, respectively, of the full specification RAM components used in
its contract manufacturing operations from MTI. Such purchases are made by
MCMS from MTI on a purchase order basis at negotiated prices, and no long
term agreement exists or is contemplated between MTI and the Company for
the supply of such components. Shortages of certain types of electronic
components, including RAM components, have occurred in the past and may
occur in the future. Component shortages or price fluctuations could have
an adverse effect on MEI's operating results. The Company generally strives
to establish long-term relationships with key suppliers similar to the
relationships it seeks with its own customers.
MCMS orders materials and components based on purchase orders received
and accepted and seeks to minimize its inventory of materials or components
that are not identified for use in filling specific orders. However, the
Company's contract manufacturing customers generally require short delivery
cycles and quick turnaround and a substantial portion of contract
manufacturing orders are scheduled for delivery within 90 days. Although
MCMS obtains long-term product forecasts from some of its OEM customers,
the Company does not have long-term purchase commitments from its customers
and makes capital expenditures and other commitments and incurs some
inventory costs based on anticipated orders. As MCMS' OEM customers react
to variations in demand for their products due to, among other things,
product life cycles, competitive conditions or general economic conditions,
and adjust their manufacturing strategies accordingly, MCMS is exposed to
the risk of noncancelable purchase orders with its suppliers and to
inventory risks for raw materials, work in process and finished goods.
Anticipated orders from the Company's OEM customers have, in certain cases,
failed to materialize, or delivery schedules have been deferred as a result
of changes in the customer's business, thereby adversely affecting MEI's
operating results.
Nearly all of the products assembled by MCMS are assembled utilizing surface
mount technology ("SMT") whereby the leads on integrated circuits and other
electronic components are soldered to the surface of printed circuit boards.
SMT assembly requires expensive capital equipment and a high level of process
expertise. MCMS currently operates six SMT lines at its Boise, Idaho
<PAGE>
facility and two SMT lines at its Durham, North Carolina facility. In the
event that customer demand continues to increase, MEI anticipates adding
additional capacity at both facilities.
MCMS performs automated in-circuit and functional testing, and has the
capability to perform environmental stress testing as requested. As the
density and complexity of electronic circuitry increases, MCMS anticipates
a need to invest in more sophisticated automated test equipment and
inspection systems that provide both three dimensional and X-ray inspection
of in-process and final products.
MCMS also utilizes chip on board ("COB") technology. COB technology,
including multi-chip module assembly, utilizes unpackaged semiconductor die
which are attached to a printed circuit board and then sealed with epoxy.
COB is well suited for applications involving small chip count and high
lead count products. MCMS also has the capability to utilize ball grid
array packaging technology in its assembly process, a packaging technique
that utilizes an array of "solder balls" in a matrix across the bottom of
a component package as opposed to having leads around the perimeter of the
die. This emerging packaging technology is typically used on high-pin
count integrated circuits.
Marketing and Sales
MCMS markets its contract manufacturing services through a direct sales
force that interfaces with independent sales representatives and OEMs.
MCMS' contract manufacturing marketing effort is augmented by MTI's sales
force, which markets MCMS' services to MTI's customer base. In addition,
certain of the Company's executives participate in developing and expanding
key customer relationships. MCMS' contract manufacturing marketing efforts
include participating in industry conferences and publishing articles in
trade journals.
MCMS' marketing and sales organization works closely with MTI to
identify potential cross-selling opportunities, and many of the Company's
contract manufacturing customers were initially obtained through MTI's
customer base. The Company believes that its relationship with MTI has been
an important factor in attracting and retaining contract manufacturing
customers. To the extent that the relationship between MCMS and MTI
diverges or is perceived to diverge, the Company could be adversely
affected.
Backlog
MCMS' backlog as of August 31, 1995 and September 1, 1994 was
approximately $95.0 million and $22.3 million, respectively. Backlog
generally consists of purchase orders believed to be firm that are expected
to be filled within the next three months. Because of variations in the
timing of orders, delivery intervals, material availability, customer and
product mix and delivery schedules, among other reasons, MCMS' backlog as
of any particular date may not be representative of actual sales for any
succeeding period.
Competition
MCMS' contract manufacturing operations compete against numerous
domestic and offshore contract manufacturers, including a significant
number of local and regional companies. In addition, MCMS competes against
the in-house manufacturing capabilities of certain of its existing
customers as well as with certain large computer manufacturers, including
IBM and its subsidiaries, which also offer third party contract
manufacturing services. The Company's contract manufacturing competitors
include Avex Electronics, Inc., Benchmark Electronics, Inc., DOVAtron
International, Inc., Flextronics International, Group Technologies
Corporation, Jabil Circuits, Inc., SCI Systems, Inc. and Solectron
Corporation, among others. Many of MEI's competitors have substantially
greater manufacturing, financial and marketing resources than MEI and have
manufacturing operations at multiple locations domestically and overseas.
Many of the Company's contract manufacturing customers also have
manufacturing relationships with one or more of MEI's competitors.
MEI believes that the significant competitive factors in contract
manufacturing are technology, quality, service, price, location and the
ability to offer flexible delivery schedules and deliver finished products
on an expeditious and timely basis in accordance with customers'
expectations. Although MEI believes it generally competes favorably with
respect to these factors, the Company may be at a disadvantage as to price
when compared to manufacturers with substantial offshore facilities or
substantially larger domestic facilities. There can be no assurance that
the Company will compete successfully in the future with regard to these
factors.
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Memory Products
MEI's memory products operation recovers, tests and markets
semiconductor memory components that do not meet full industry
specifications ("nonstandard RAM components") and designs, assembles and
markets peripheral add-on memory products utilizing full specification and
nonstandard RAM components.
Component Recovery
Historically, nonstandard RAM components have generally been discarded
by semiconductor manufacturers. Manufacturers have been reluctant to sell
their nonstandard RAM components because such components could compete with
their full specification RAM components for similar applications and the
perception that an active effort to realize value from nonstandard RAM
components could lessen their focus on the production and marketing of full
specification products. Semiconductor memory manufacturers have been
especially reluctant to sell their nonstandard RAM components to third
party recovery operations due to concern that subsequent testing would
reveal proprietary data regarding the manufacturers' yields and processes.
Despite the foregoing, as standard device densities and cost per device
have increased, semiconductor memory manufacturers have sought ways to
recover a portion of their manufacturing costs through recovery of
nonstandard RAM components. MEI's component recovery operation involves
obtaining nonstandard RAM components from such manufacturers, testing and
grading these components to their highest functional level and identifying
cost effective applications for these components. MEI markets nonstandard
RAM components for a wide variety of applications such as PC systems and
peripherals, telephone answering machines, electronic games, laser
printers, facsimile machines and cellular telephones. The Company's
contract manufacturing operation has also been able to utilize nonstandard
RAM components in the manufacture of complex circuit board assemblies for
selected OEM customers.
A substantial majority of the nonstandard RAM components used in MEI's
component recovery operation are obtained from MTI pursuant to the
Component Recovery Revenue Sharing Agreement dated July 14, 1994, between
the Company and MTI (the "Revenue Sharing Agreement"). Specifically, in
fiscal 1995 and 1994, approximately 89% and 98%, respectively, of the
nonstandard RAM components sold by MEI's component recovery operation were
obtained from MTI. The Revenue Sharing Agreement expires in September 1997
and may be amended with the consent of the parties. Pursuant to the Revenue
Sharing Agreement, MTI delivers to MEI all of the nonstandard RAM
components produced at its operations, and MEI pays to MTI an amount equal
to one-half of the net sales realized from sales of nonstandard RAM
components to third parties and one-half of the transfer price for products
identified for internal use in MCMS' contract manufacturing operation.
There can be no assurance that MTI will continue to generate sufficient
quantities of nonstandard RAM components to maintain the Company's
component recovery operation at its existing level. Termination or
renegotiation of the agreement at the end of its term resulting in terms
less favorable to MEI could have a material adverse effect on the Company's
operating results. In addition, MEI's component recovery business could be
adversely affected by reductions in the availability of nonstandard RAM
components due to operating shortfalls or other factors, variances in MTI's
defect rate, product mix, or the overall quality of nonstandard RAM
components, any of which could cause substantial variances in MEI's test
costs or reduce MEI's revenue from the resale of such components. Although
MTI supplies the substantial majority of nonstandard RAM components for the
Company's component recovery operation, MEI also purchases nonstandard RAM
components from other semiconductor manufacturers. There can be no
assurance that purchases from these sources will continue. MEI intends to
continue to pursue additional sources of nonstandard RAM components,
however, there can be no assurance that significant additional suppliers
will be secured.
Component Recovery Process. Effective component recovery requires a
significant investment in capital equipment as well as expertise in
semiconductor manufacturing processes and sophisticated testing hardware
and software. Semiconductor manufacturing involves a highly complex series
of process steps performed to create specific electronic features on
silicon wafers. After fabrication, wafers are sent through wafer probe for
their first test of electrical functionality. At wafer probe, nonstandard
die are segregated while those die which potentially meet full performance
specifications move to packaging and test. The Company maintains personnel
in MTI's semiconductor manufacturing facility to identify at the wafer
probe stage nonstandard die which may qualify for component recovery. Once
nonstandard die are identified at probe as recoverable, the die are packaged
by MTI and delivered to MEI for testing and grading. Semiconductors intended
for use in the broadest range of applications must meet rigorous functionality
specifications and are tested extensively and sorted based on performance.
RAM components which do not achieve a full range of acceptable performance
specifications at the testing step of the semiconductor manufacturing
process are also identified and delivered to MEI for testing and grading.
Upon delivery to MEI, nonstandard RAM components are grouped according to
device and package type and staged for the specific sequence of electrical,
environmental and mechanical testing identified for that group.
MEI relies on its test and product
<PAGE>
engineers to develop the complex testing algorithms and procedures
necessary to cost effectively recover nonstandard RAM components.
Engineering resources are also expended to develop and implement
proprietary software and hardware modifications to automated test equipment
in order to assess the highest functional level of nonstandard RAM
components. Throughout the testing process, nonstandard RAM components are
continually graded in an effort to identify less functional nonstandard RAM
components and to minimize additional testing with respect to such
components. The semiconductor manufacturers' markings are eliminated during
the testing process and the devices are remarked with the Company's SpecTek
brandname or a specific customer's device marking. Test and product
engineers develop burn-in testing procedures in order to ensure the
reliability of the devices being produced. MEI strives to maintain close
working relationships between its component recovery engineering staff and
its customers, and modifies its test procedures and test specifications to
ensure that nonstandard RAM components properly address customer
performance requirements. Once all electrical and environmental testing is
accomplished, the devices are subjected to automated and human inspection
in order to verify that the devices meet mechanical and cosmetic
specifications relating to package, mark and device lead integrity.
Marketing and Products. MEI's nonstandard RAM components are marketed
primarily to domestic customers through the Company's direct sales force,
and to international customers through manufacturing representatives. In
fiscal 1995, a majority of the Company's component recovery products were
used in the Company's peripheral add-on memory products. To date, the rate
of growth in the Company's component recovery business has been more a
function of the supply of nonstandard RAM components than the demand for
such components once they are recovered. The market for semiconductor
memory historically has been quite volatile and has in the past experienced
significant downturns, characterized by diminished product demand,
production overcapacity and a decline in average selling prices. There can
be no assurance that the currently favorable market conditions will
continue.
MEI typically offers a 90 day limited warranty on nonstandard RAM
components. Longer warranties are only offered in special circumstances.
Although MEI's historical warranty claims with respect to nonstandard RAM
components have not been material, there can be no assurance that the
Company will not experience significant future warranty claims with respect
to nonstandard RAM components.
Competition. To date, MEI has not experienced significant direct
competition with respect to its component recovery operation. The principal
competitive factors in this business are testing capabilities, nonstandard
RAM component prices and access to sources of nonstandard RAM components.
The price of nonstandard RAM components is directly influenced by the price
of full specification RAM components. As higher density memory devices
become more prevalent, error correction technologies and solutions improve
and costs per device increase, semiconductor memory manufacturers have
sought ways to recover a portion of their manufacturing costs through
recovery of nonstandard RAM components. To meet this need, certain
manufacturers have established internal capabilities and independent
companies are pursuing opportunities to recover, test and market
nonstandard RAM components. In addition, as more semiconductor memory
manufacturers recover nonstandard RAM components, the pressure on the
remaining manufacturers may increase to develop similar programs, whether
internal or external, in order to generate revenue for their nonstandard
RAM components. The risk of competition from in-house semiconductor
manufacturers is especially important because there are only a few large
semiconductor memory manufacturers, and an in-house operation would
eliminate the manufacturer as a potential source of supply to MEI. Upon
termination or expiration of the Revenue Sharing Agreement, MTI could
develop its own component recovery operation. The loss of a sourcing
arrangement, particularly the Company's arrangement with MTI, would have a
material adverse effect on MEI's operating results.
Peripheral Add-On Memory Products
MEI markets and sells peripheral add-on memory products consisting of
single in-line memory modules ("SIMMS") containing both nonstandard and
full specification RAM components. The success of the Company's peripheral
add-on memory operations is largely dependent upon its ability to obtain
nonstandard and full specification RAM components. In fiscal 1995, a
substantial portion of the Company's peripheral add-on memory product sales
were attributable to sales of peripheral add-on memory products which
contained nonstandard RAM components.
The Company's peripheral add-on memory products are primarily assembled
by third party subcontractors utilizing module printed circuit boards
designed by MEI and RAM components obtained by MEI and shipped to the
subcontractor for assembly. The nonstandard RAM components shipped to the
subcontractor are tested by MEI to determine their functionality. MEI
custom designs printed circuit boards to attempt to achieve full module
functionality using the nonstandard RAM components. After completion, the
modules are either shipped directly to the customer or delivered to the
Company for later shipment. MEI offers a one-year
<PAGE>
limited warranty on memory modules. Although the Company's historical
warranty claims with respect to peripheral add-on memory products have not
been material, there can be no assurance that MEI will not experience
significant future warranty claims with respect to such products.
To date, sales of peripheral add-on memory products have related
directly to the availability of RAM components from semiconductor
manufacturers. The majority of the Company's peripheral add-on memory
product net sales for fiscal 1995 were attributable to sales of modules
utilizing nonstandard RAM components recovered by the Company's component
recovery operations. In addition, substantially all of the full
specification RAM components used in MEI's peripheral add-on memory
products were purchased from MTI. Although MEI has experienced substantial
annual increases in sales of memory modules through fiscal 1995, such sales
have fluctuated significantly from quarter to quarter depending upon the
availability of RAM components. Rather than obtaining a steady flow of RAM
components from manufacturers pursuant to long-term agreements, MEI
typically purchases RAM components pursuant to individual purchase orders
on an "as available" basis. The Company is unable to predict with any
degree of confidence which manufacturers, including MTI, may have RAM
components available and within what time periods. There can be no
assurance that the Company will be able to continue to purchase RAM
components from MTI or other sources of supply at a rate sufficient to
support existing levels of sales or continued growth in sales, if at all.
The Company markets its peripheral add-on memory products primarily to
third party resellers and OEMs. Products sold to resellers are
subsequently sold to retail outlets, PC manufacturers and manufacturers of
various electronic products, such as laser printers, answering machines and
electronic games.
Competitors of the Company's peripheral add-on memory business include
semiconductor manufacturers, custom module manufacturers and other entities
having memory modules available for sale to resellers and OEMs.
General
Export Sales
Export sales totaled approximately $76.7 million, $26.0 million and
$12.4 million in fiscal 1995, 1994 and 1993, respectively. Export sales
are made primarily in United States currency.
Intellectual Property
As of September 15, 1995, the Company owned 14 United States patents
relating to the use of its products and processes and had numerous United
States and foreign patent applications pending.
It is common in the PC industry for patent and copyright infringement
claims, as well as other intellectual property rights claims to be asserted
against component suppliers and PC manufacturers. Periodically, MEI is
made aware that the technology used by MEI may infringe on product or
process technology rights held by others. MEI has accrued a liability and
charged operations for the estimated costs of settlement or adjudication of
these asserted claims for alleged infringement and other unasserted claims
arising prior to the balance sheet date. MEI would be placed at a
disadvantage if its competitors were to obtain licenses with lower royalty
fee payments or other terms more favorable than those received by the
Company. The Company has entered into several patent and software license
agreements with third parties which require one-time or periodic royalty
payments, some of which expire within the next year. The Company is unable
to predict whether these license agreements can be obtained or renewed on
terms acceptable to the Company. If the Company or its suppliers were
unable to obtain licenses necessary to use protected technology in their
products, the Company may be forced to market products without certain
technological features. MEI could also incur substantial costs to defend
legal actions taken against it relating to patent or copyright protected
technology. The inability to obtain licenses necessary to use certain
technology or its inability to obtain such licenses on competitive terms,
or a finding of infringement against the Company, could have a material
adverse effect on the Company.
MEI regards its contract manufacturing processes and testing procedures
as proprietary trade secrets and confidential information. The Company
relies largely upon a combination of agreements with its OEM customers and
internal security systems, confidentiality procedures and employee
agreements to maintain the trade secrecy of its manufacturing processes.
<PAGE>
Employees
As of August 31, 1995, the Company had approximately 1,370 employees in
its PC operations, 355 employees in its contract manufacturing operations
and 230 employees in its memory products operations. None of the Company's
employees is represented by a labor organization with respect to their
employment by the Company, the Company has never had a work stoppage, and
the Company considers its employee relations satisfactory.
Environmental Regulation
MEI's operations are subject to certain federal, state and local
environmental regulatory requirements relating to environmental and waste
management, and there can be no assurance that material costs and
liabilities will not be incurred in maintaining or establishing compliance
with current or future requirements. The Company has modified its circuit
board cleaning processes at MCMS to eliminate the use of substantially all
ozone depleting chlorofluorocarbons, and aqueous (water-based) methods are
now used in its cleaning operations. The content of the resulting waste
water from this cleaning process is closely monitored and subject to
stringent regulations.
Some risks of costs and liabilities related to these matters are
inherent in the Company's business, as with many similar businesses. MEI
believes that its business is operated in compliance with applicable
environmental regulations, the violation of which could have a material
adverse effect on the Company. In the event of violation, these
regulations provide for civil and criminal fines, injunctions and other
sanctions and, in certain instances, allow third parties to sue to enforce
compliance. In addition, new, modified or more stringent requirements or
enforcement policies could be adopted that may adversely affect the
Company.
MEI periodically generates and temporarily handles limited amounts of
materials that are considered hazardous waste under applicable law. The
Company contracts for the off-site disposal of these materials.
<PAGE>
Executive Officers and Directors of the Registrant
The executive officers and directors of the Company and their ages as of
August 31, 1995, are as follows:
<TABLE>
<CAPTION>
Name Position Age
- ---- -------- ---
<S> <C> <C>
Joseph M. Daltoso Chairman of the Board, President and Chief 33
Executive Officer of the Company
T. Erik Oaas Vice President, Finance and Chief Financial 42
Officer of the Company, Director
Gregory D. Stevenson Executive Vice President, Operations of the 34
Company, Director
Robert F. Subia Chairman, President and Chief Executive Officer 32
of Micron Custom Manufacturing Services, Inc. (a
wholly-owned subsidiary of the Company),
Director
Steven R. Appleton Chairman of the Board, President and Chief 35
Executive Officer of Micron Technology, Inc.,
Director
Jerry M. Hess Chairman and Chief Executive Officer of the J.M. 57
Hess Construction Company, Inc., Director
Robert A. Lothrop Retired, former Senior Vice President of the 69
J.R. Simplot Company, Director
John R. Simplot Retired, former Chairman of the Board of the 86
J.R. Simplot Company, Director
Jess Asla Vice President, Operations of Micron Custom 33
Manufacturing Services, Inc. (a wholly-owned
subsidiary of the Company)
Kenneth C. Birch Vice President, PC Engineering 31
George A. Haneke Vice President, Chief Information Officer 47
Nelson L. Hanks Vice President, Purchasing 42
Dean A. Klein Vice President, Research and Development 38
Brian C. Klene Executive Vice President, Sales and Marketing 37
Roderic W. Lewis Vice President, General Counsel and Corporate 40
Secretary
Pete J. Scamardo Vice President, Product Marketing 32
Steve L. Schmidt Vice President, Alternate Sales 33
Gene P. Thomas, Jr. Vice President, Direct Sales 34
</TABLE>
<PAGE>
Background of Executive Officers
Joseph M. Daltoso served as Micron Technology, Inc.'s Memory
Applications Group Manager from May 1990 until April 1992, when he was
named President and a director of Micron Custom Manufacturing Services,
Inc. then a wholly-owned subsidiary of Micron Technology, Inc. In July
1992, Mr. Daltoso was named Chairman of the Board of Micron Custom
Manufacturing Services, Inc. and in August 1994 he was named Chief
Executive Officer of Micron Custom Manufacturing Services, Inc. At the
Effective Time of the Merger, Mr. Daltoso was appointed Executive Vice
President, Operations and a director of the Company. He was named Chairman
of the Board, President and Chief Executive Officer of the Company on April
17, 1995.
T. Erik Oaas served as the Administration Manager of Micron Technology,
Inc.'s Memory Applications Group from May 1990 to April 1992, when he was
named Vice President, Finance and Treasurer and a director of Micron Custom
Manufacturing Services, Inc. in July 1992. At the Effective Time of the
Merger, Mr. Oaas was appointed Vice President, Finance and Chief Financial
Officer and a director of the Company.
Gregory D. Stevenson served as Micron Technology, Inc.'s Test
Manufacturing Manager from October 1989 to April 1990. Mr. Stevenson
served as Micron Technology, Inc.'s Partials Business Unit Manager from
April 1990 until April 1992. Mr. Stevenson joined Micron Custom
Manufacturing Services, Inc. as Business Unit Manager for Component
Recovery in April 1992, was appointed Vice President, Component Recovery in
July 1992, and was appointed a director of Micron Custom Manufacturing
Services, Inc. in September 1992, and Vice President, Operations in August
1993. At the Effective Time of the Merger, Mr. Stevenson was appointed Vice
President, Nampa Operations and served in that position until July 1995
when Mr. Stevenson was appointed Executive Vice President, Operations and a
director of the Company.
Robert F. Subia was employed by Micron Technology, Inc. where he held
various sales management responsibilities, including IBM Account Manager
and Regional Sales Manager, from 1986 to 1993. Mr. Subia joined Micron
Custom Manufacturing Services, Inc. in February 1993 as Director of Sales
and held this position until August 1994, when he was appointed Vice
President, Sales of Micron Custom Manufacturing Services, Inc. On April 17,
1995, Mr. Subia was appointed Chairman, President and CEO of Micron Custom
Manufacturing Services, Inc., a wholly-owned subsidiary of the Company.
Mr. Subia was appointed a director of the Company on October 2, 1995.
Steven R. Appleton served as Vice President, Manufacturing of Micron
Technology, Inc. from August 1989 until April 1991, when he was appointed
President and Chief Operating Officer and a director of Micron Technology,
Inc. In July 1992, he assumed responsibilities as Chairman of the Board,
President and Chief Executive Officer of Micron Semiconductor, Inc. (then a
wholly-owned subsidiary of Micron Technology, Inc.) and resigned as a
director and an officer of Micron Technology, Inc. In May 1994, Mr.
Appleton was re-elected to Micron Technology, Inc.'s Board of Directors.
He was named Chairman of the Board, President and Chief Executive Officer
of Micron Technology, Inc. in September 1994. At the Effective Time of the
Merger, Mr. Appleton was named Chairman of the Board, President and Chief
Executive Officer of the Company. He resigned from these positions on
April 17, 1995, but remains as a director of the Company.
Jerry M. Hess has served as Chairman and Chief Executive Officer of J.M.
Hess Construction Co., Inc. since 1959. Mr. Hess has served on Micron
Technology, Inc.'s Board of Directors since 1994. At the Effective Time of
the Merger, Mr. Hess was appointed a director of the Company.
Robert A. Lothrop served as the Senior Vice President of the J.R. Simplot
Company, a privately held company involved in food processing and in
manufacturing and marketing fertilizers and agricultural chemicals, from
January 1986 until his retirement in January 1991. Mr. Lothrop was elected
to Micron Technology, Inc.'s Board of Directors in 1986. In 1992, he was
elected to the Board of Directors of Micron Semiconductor, Inc., then a
wholly-owned subsidiary of Micron Technology, Inc., and resigned as a
director of Micron Technology, Inc. Mr. Lothrop was re-elected to Micron
Technology, Inc.'s Board of Directors in 1994. At the Effective Time of
the Merger, Mr. Lothrop was appointed a director of the Company.
John R. Simplot founded the J.R. Simplot Company and served as the
Chairman of the Board of Directors until his retirement in April 1994. Mr.
Simplot continues to serve as a director of the J.R. Simplot Company. Mr.
Simplot has served on Micron Technology, Inc.'s Board of Directors since
1980. At the Effective Time of the Merger, Mr. Simplot was appointed a
director of the Company.
<PAGE>
Jess Asla served as the Process Engineer Manager for Micron Technology,
Inc.'s Memory Applications Group from 1988 until July 1994, when he was
named Director of Engineering for Micron Custom Manufacturing Services,
Inc. On April 17, 1995, Mr. Asla was appointed Vice President, Operations
of Micron Custom Manufacturing Services, Inc., a wholly-owned subsidiary of
the Company.
Kenneth C. Birch served as an Applications Engineer for Micron
Technology, Inc.'s Memory Applications Group from 1989 to 1990, when he was
named PC Product Manager. Mr. Birch served in this position until August
1991, when he joined Micron Computer, Inc. as Vice President, Operations
and Engineering. Mr. Birch was appointed a director of Micron Computer,
Inc. in April 1993, and in February 1994, Mr. Birch was appointed as Vice
President, Engineering. At the Effective Time of the Merger, Mr. Birch was
appointed Vice President, PC Engineering.
George A. Haneke joined Micron Technology, Inc. in May 1988 and became
Accounting Manager in 1992. Mr. Haneke joined Micron Computer, Inc. as its
Vice President, Finance, Treasurer and Chief Financial Officer in September
1993 and served in this position until the Effective Time of the Merger. At
the Effective Time of the Merger, Mr. Haneke was appointed Vice President,
Chief Information Officer.
Nelson L. Hanks served as a consultant for Micron Technology, Inc. from
1989 to 1991. In 1991, Mr. Hanks was named Chief Executive Officer of
Micron Europe Limited, a wholly-owned subsidiary of Micron Technology,
Inc., and served in this position until 1993. From 1993 until the
Effective Time of the Merger, Mr. Hanks served as Special Projects Manager
for Micron Technology, Inc. At the Effective Time of the Merger, Mr. Hanks
was appointed Vice President, Purchasing.
Brian C. Klene joined Micron Technology, Inc. in January 1989 as
Director, Sales and Marketing of the Memory Applications Group and served
in that position until July 1990 when he was named Regional Sales Manager
for Micron Technology, Inc. He served in that position until January 1991
when he was named National Sales Manager of Micron Technology, Inc. In
July 1995, Mr. Klene joined the Company and was named Executive Vice
President, Sales and Marketing.
Dean A. Klein served as President and co-founder of PC Tech, Inc., a
wholly-owned subsidiary of the Company, from its inception in 1984. After
the acquisition of PC Tech, Inc. by the Company in February 1992, Mr. Klein
served as Vice President, Research and Development of the Company and
President of PC Tech, Inc.
Roderic W. Lewis practiced corporate and securities law with the law
firms of LeBoeuf, Lamb, Leiby & MacRae and Rogers, Mackey, Price & Anderson
prior to joining Micron Technology, Inc. in 1991 as Associate General
Counsel. Mr. Lewis was appointed Assistant General Counsel for Micron
Technology, Inc. in 1993. At the Effective Time of the Merger, Mr. Lewis
was appointed Vice President, General Counsel and Corporate Secretary.
Pete J. Scamardo served in various sales and marketing related management
positions with CompuAdd, Inc. prior to joining Micron Computer, Inc. in
November 1991 as Director of Marketing and Strategic Relations. Mr.
Scamardo was appointed Vice President, Product Marketing of the Company on
July 31, 1995.
Steven L. Schmidt was employed by Micron Technology, Inc. as a Regional
Sales Manager from 1989 until August 1991 when he was named Vice President,
Sales and Marketing of Micron Computer, Inc. In 1992, Mr. Schmidt was
appointed Executive Vice President and a director of Micron Computer, Inc.
At the Effective Time of the Merger, Mr. Schmidt was appointed Vice
President. On July 31, 1995, Mr. Schmidt was appointed Vice President,
Alternate Sales.
Gene P. Thomas, Jr. served in sales managerial roles with Polaroid
Corporation and CompuAdd Computer and was appointed Director of Marketing
for CompuAdd in 1993. Mr. Thomas joined Micron Computer, Inc. as Director
of Sales in March 1993 and was appointed Vice President, Sales and
Marketing in December 1993. At the Effective Time of the Merger, Mr. Thomas
was appointed Vice President, Micron Computer Sales and Marketing. On July
31, 1995, Mr. Thomas was appointed Vice President, Direct Sales.
<PAGE>
Item 2. Properties
The Company's corporate headquarters, the majority of its PC operations
and its memory products operations are based in a 260,000 square foot
facility located in Nampa, Idaho. Approximately 136,000 square feet of the
Nampa facility are dedicated to PC manufacturing, approximately 40,000
square feet are dedicated to memory products operations and the balance of
the facility is dedicated to sales, support and administration. The Nampa
facility is located on a site of approximately 30 acres, owned by MEI. MEI
currently holds an option to purchase approximately 40 additional acres of
real property adjacent to the facility from a member of its Board of
Directors.
The remainder of the Company's PC operations are located in a 236,000
square foot leased facility in Minneapolis, Minnesota. Approximately
154,000 square feet of this facility are dedicated to manufacturing and the
remainder is dedicated to sales, support and administration. The current
lease term expires in May 1996 with a one year renewal option period.
MCMS' contract manufacturing operations are located in two adjacent
buildings in Boise, Idaho, comprising approximately 90,000 square feet,
with approximately 60,000 square feet dedicated to manufacturing. MCMS
also occupies a 30,000 square foot leased facility in Durham, North
Carolina, with approximately 22,000 square feet dedicated to manufacturing.
The buildings and substantially all of the adjacent land at the Boise
facilities are owned by the Company. The Boise property is subject to deeds
of trust securing indebtedness to MTI. The lease on the Durham, North
Carolina facility extends through February 2005 with an option to extend
the lease for an additional five-year period.
Other facilities leased by the Company include a retail location in
Boise, Idaho and two factory outlets in the greater Minneapolis/St. Paul
area. The Company plans to open a retail store near Salt Lake City, Utah
in November 1995.
Item 3. Legal Proceedings
The Company is a party to various legal actions arising out of the
normal course of business, none of which is expected to have a material
effect on the Company's financial position or results of operations.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1994 Annual Meeting of Shareholders on June 20,
1995. The following summarizes the proposals presented to shareholders and
the voting results:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
<TABLE>
<cpation>
FOR WITHHOLD AUTHORITY
--- ------------------
<S> <C> <C>
Steven R. Appleton 86,650,472 43,508
Joseph M. Daltoso 86,651,450 42,530
Gregory E. Herrick 86,653,175 40,805
Jerry M. Hess 86,649,615 44,365
Robert A. Lothrop 86,612,651 81,329
Chase S. Mart 86,594,106 99,874
T. Erik Oaas 86,654,095 39,885
John R. Simplot 86,607,296 86,684
</TABLE>
2. To approve the adoption of the Company's 1995 Stock Option Plan and
the reservation of 5,000,000 shares of the Company's common stock for
issuance thereunder.
FOR 82,500,363 AGAINST 266,757 ABSTAIN 73,472 BROKER NON-VOTE 3,853,388
---------- ------- ------ ---------
3. To approve the adoption of the Company's 1995 Employee Stock Purchase
Plan and the reservation of 2,500,000 shares of the Company's common stock
for issuance thereunder.
FOR 82,932,281 AGAINST 151,311 ABSTAIN 67,681 BROKER NON-VOTE 3,542,707
---------- ------- ------ ---------
4. To approve the adoption of the Company's Executive Bonus Plan.
FOR 82,823,711 AGAINST 436,705 ABSTAIN 164,309 BROKER NON-VOTE 3,269,255
---------- ------- ------- ---------
5. To ratify the appointment of Coopers & Lybrand L.L.P. as independent
accountants of the Company for the fiscal year ending August 31, 1995.
FOR 86,558,045 AGAINST 54,711 ABSTAIN 81,224 BROKER NON-VOTE 0
---------- ------ ------ ---------
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market for Common Stock
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "MUEI." The following table sets forth the high and low sale prices
for the Company's common stock for each quarter of fiscal 1995 and 1994, as
reported by The Nasdaq Stock Market:
<TABLE>
<CAPTION>
High Low
---- ---
Fiscal 1995:
<S> <C> <C>
Fourth quarter $ 20.125 $ 13.750
Third quarter 16.250 9.625
Second quarter 11.750 6.750
First quarter 8.125 2.750
Fiscal 1994:
Fourth quarter $ 3.750 $ 2.375
Third quarter 3.500 2.375
Second quarter 4.125 3.000
First quarter 5.125 2.500
</TABLE>
On October 17, 1994, the Company announced its intent to merge with
Micron Computer, Inc. and Micron Custom Manufacturing Services, Inc. The
merger was effective on April 7, 1995. Prior to April 7, 1995, the
Company's common stock was traded under the symbol "ZEOS."
Holders of Record
As of August 31, 1995, there were approximately 1,500 shareholders of
record of the Company's common stock.
Dividends
The Company did not declare or pay any cash dividends during fiscal 1995
or fiscal 1994.
<PAGE>
Item 6. Selected Financial Data
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $999,999 $412,938 $162,180 $ 63,692
Operating income 106,493 59,851 21,622 3,716
Net income 65,086 36,898 13,623 2,169
Earnings per share 0.74 0.45 0.17 0.03
Current assets 308,755 120,880 57,439 26,971
Total assets 382,716 151,739 70,289 36,848
Long-term debt 5,801 6,822 8,135 9,433
Shareholders' equity 173,663 68,169 26,874 13,195
</TABLE>
On April 7, 1995, MCI and MCMS, subsidiaries of MTI, merged with and into
ZEOS, and the name of the Company was changed to Micron Electronics, Inc.
The Company's fiscal year is a 52 or 53 week period ending on the Thursday
closest to August 31, which was the fiscal year of MCI and MCMS. A new
basis of accounting, based on fair values, was established for the assets
and liabilities of ZEOS. Subsequent to the merger, the Company's financial
statements reflect the combined results of operations, financial position
and cash flows of ZEOS, MCI and MCMS based on the new basis of accounting
for ZEOS and the historical cost basis of MCI and MCMS. Prior to April 7,
1995, the financial statements of the Company include only the results of
operations, financial position and cash flows of MCI and MCMS, both of
which began operations in fiscal 1992.
See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Certain Factors" for a discussion of
material uncertainties which might cause the data reflected herein not to
be indicative of the Company's future financial condition or results of
operations.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Micron Electronics, Inc. ("MEI" or the "Company") manufactures
electronic products for a wide range of computing and digital applications.
The Company develops, markets, manufactures, sells and supports PC systems
for consumer and business use, provides contract manufacturing services to
original equipment manufacturers, maintains a component recovery operation
and assembles and markets peripheral add-on memory products.
MEI completed its fiscal year on August 31, 1995. On April 7, 1995,
Micron Computer, Inc. ("MCI") and Micron Custom Manufacturing Services,
Inc. ("MCMS") merged with and into ZEOS International, Ltd. ("ZEOS"), and
the Company's name was changed to Micron Electronics, Inc. The Company's
fiscal year corresponds with the fiscal year of MCI and MCMS and is the 52
or 53 week period ending on the Thursday closest to August 31. The
Company's actual results of operations reflect the merged operations of the
Company subsequent to April 7, 1995, and the combined results of operations
of only MCI and MCMS prior thereto.
All yearly references are to the Company's fiscal years ended August 31,
1995, September 1, 1994 and September 2, 1993, unless otherwise indicated.
All tabular dollar amounts presented are in thousands.
The following is a summary of the Company's actual results of
operations:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------
August 31, 1995 September 1, 1994 September 2, 1993
--------------- ----------------- -----------------
Percent Percent Percent
Amount of Sales Amount of Sales Amount of Sales
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Net sales $999,999 100.0% $412,938 100.0% $162,180 100.0%
Cost of goods sold 816,662 81.7% 326,643 79.1% 129,845 80.1%
Gross margin 183,337 18.3% 86,295 20.9% 32,335 19.9%
Selling, general and
administrative expenses 74,951 7.5% 25,883 6.3% 10,317 6.4%
Net income 65,086 6.5% 36,898 8.9% 13,623 8.4%
</TABLE>
Pro Forma Results of Operations
Due to the significance of the merger, the Company believes that
discussion and analysis of the Company's results of operations on a pro
forma basis, which include ZEOS' results of operations prior to the merger,
provides a more meaningful comparison than discussion and analysis of
actual results of operations which, prior to the merger, includes only the
operations of MCI and MCMS. The following discussion and analysis presents
the Company's results of operations for the years ended August 31, 1995,
September 1, 1994 and September 2, 1993, on a pro forma basis, as if the
merger had occurred at the beginning of the periods after giving effect to
pro forma adjustments, including amortization of goodwill, certain product
and process technology costs, and related income tax effects.
The pro forma information is provided for illustrative purposes and is
not necessarily indicative of the combined results of operations that would
have actually occurred for such periods nor does it represent a forecast of
results of operations for any future periods.
<PAGE>
The following is a summary of the Company's pro forma results of
operations:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------
August 31, 1995 September 1, 1994 September 2, 1993
--------------- ----------------- -----------------
Percent Percent Percent
Amount of Sales Amount of Sales Amount of Sales
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Pro forma net sales $1,193,330 100.0% $650,983 100.0% $368,144 100.0%
Pro forma cost of goods sold 983,752 82.4% 546,144 83.9% 317,557 86.3%
Pro forma gross margin 209,578 17.6% 104,839 16.1% 50,587 13.7%
Pro forma selling, general and
administrative expenses 99,524 8.3% 62,005 9.5% 51,261 13.9%
Pro forma net income (loss) 65,980 5.5% 25,191 3.9% (2,403) (0.7%)
</TABLE>
Pro Forma Net Sales
Pro forma net sales for the Company's separate product lines are as
follows:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------
August 31, 1995 September 1, 1994 September 2, 1993
--------------- ----------------- -----------------
Percent Percent Percent
Amount of Sales Amount of Sales Amount of Sales
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
PC systems $ 765,009 64.1% $366,640 56.3% $242,784 65.9%
Contract manufacturing 188,145 15.8% 117,278 18.0% 56,750 15.4%
Peripheral add-on memory
products 170,496 14.3% 138,985 21.4% 58,148 15.9%
Component recovery 69,680 5.8% 28,080 4.3% 10,462 2.8%
---------- ------ ------- ------ -------- ------
Total pro forma net sales $1,193,330 100.0% $650,983 100.0% $368,144 100.0%
========== ====== ======== ====== ======== ======
</TABLE>
Pro forma net sales for the year ended August 31, 1995 were 83.3% higher
than pro forma net sales for the comparable period in 1994, primarily as a
result of a significant increase in the number of desktop PC systems sold,
higher contract manufacturing sales, higher component recovery unit sales,
increased sales of higher density peripheral add-on memory products and, to
a lesser extent, higher overall average selling prices for the Company's
component recovery, peripheral add-on memory and desktop PC system
products. Pro forma net sales for 1994 were 76.8% higher than for 1993 as
a result of a significant increase in the number of desktop PC systems sold
and to a lesser extent a slight increase in average PC systems selling
prices. In addition, there were significant increases in sales of
peripheral add-on memory products and in contract manufacturing sales, and
to a lesser extent, an increase in component recovery sales.
Pro forma unit sales of PC systems in 1995 increased approximately 111%
compared to 1994, and increased approximately 40% in 1994 over 1993. In
1995, substantially all PC unit sales were of desktop systems, whereas
sales of notebook PC systems represented 6% of 1994 unit sales and 13% of
1993 unit sales. The increase in unit sales of desktop PC systems in 1995
was due to a significant increase in unit sales of Micron brand PC systems.
The increase in unit sales of desktop PC systems in 1994 was due primarily
to a significant increase in unit sales of Micron brand PC systems and to a
lesser extent, an increase in unit sales of ZEOS brand PC systems. The
Company believes that the year to year unit sales of the Company's Micron
brand PC systems increased as a result of an increase in name recognition
and market acceptance and competitive pricing. Increased name recognition
and market acceptance resulted primarily from the receipt of a number of
awards from computer trade magazines relating to the performance
characteristics of Micron brand PC systems and from increased advertising
expenditures during the years presented. In the event that the Company is
unsuccessful in winning awards from computer trade magazines in the future,
consumer interest in its PC systems could decline materially. During 1995
and 1994, sales of Micron and ZEOS brand PC systems benefited generally
from continued strong demand in the market for PC products.
Slightly higher overall average selling prices of PC systems in 1995
and 1994 resulted principally from a shift within the desktop PC product
lines, beginning in the fourth quarter of 1994, from 486 microprocessor
based systems to relatively higher priced
<PAGE>
Pentium(Registered Trademark) microprocessor based systems. This was
offset in part by continued competitive pricing pressure. The slight
increase in average selling prices in 1994 was partially offset by a
transition away from the higher priced ZEOS brand notebook systems to
the desktop PC systems.
The Company continues to evaluate its product strategies, including (i)
the coordination of Micron and ZEOS brand marketing strategies, (ii) the
sharing of Micron and ZEOS research and development efforts, and (iii) the
coordination and potential integration of Micron and ZEOS product lines.
Actions taken in this regard could result in a number of adverse
consequences, including, but not limited to, confusion in the marketplace
regarding the Company's product lines, a decrease in the Company's unit
sales and the recognition of unanticipated expenses, which could have a
material adverse effect on the Company's results of operations.
Contract manufacturing sales were higher in 1995 primarily due to
increased manufacturing capacity obtained through the addition of a new
surface mount technology ("SMT") line at the Company's Boise facility and
the upgrade of the Company's existing production lines. The expansion and
upgrade were made in response to an increase in demand for the Company's
contract manufacturing services from OEM customers and a significant
increase in demand for module products manufactured for Micron Technology,
Inc. ("MTI"), the Company's parent. Additionally, two SMT lines were
installed at the Company's Durham, North Carolina facility which became
fully operational in June 1995, bringing the Company's total number of SMT
lines to eight. Production from the North Carolina facility accounted for
only approximately 2% of the Company's contract manufacturing sales for
1995. Contract manufacturing sales were higher in 1994 than in 1993 due
primarily to increased manufacturing capacity through the addition of two
SMT assembly lines and an increase in memory density of printed circuit
boards assembled which resulted in higher average selling prices.
The Company's contract manufacturing operations rely on sales to a
relatively limited number of customers, including MTI. Modules
manufactured for MTI represented 13% of contract manufacturing sales in
1995 compared to 10% and 21%, respectively, for 1994 and 1993. While the
Company believes that MTI will continue to increase its demand for module
assembly services, MTI has indicated that it may bring some of its
requirements for module assembly services more directly under its control.
In the event that MTI adds SMT manufacturing to its assembly processes,
demand for those services from the Company may decline. However, the
Company is unable at this time to estimate the extent to which, or over
what period of time, this may occur. The loss of all or a significant
portion of this business would have an adverse effect on the Company's
results of operations. In 1995, ten contract manufacturing customers,
including MTI, accounted for 76% of the Company's contract manufacturing
sales. Developments adverse to the Company's major customers or their
products could have an adverse effect on MEI's operating results. In
addition, the Company could be adversely affected if a major customer were
unable to pay for components and services.
Component recovery sales were higher in both 1995 and 1994 as a result
of increases in both unit sales and overall average selling prices. Unit
sales increased approximately 62% in 1995 and 70% in 1994, primarily due to
increased availability of nonstandard RAM components and increases in
production capacity resulting primarily from the addition of new test and
burn-in equipment. Overall average selling prices increased approximately
50% in each of 1995 and 1994 primarily due to a shift in the product mix to
higher priced nonstandard RAM components and continued strong industry-wide
demand for semiconductor memory products. Significant competition in the
area of component recovery is beginning to develop both from semiconductor
memory manufacturers who conduct such operations in-house and from
independent component recovery operations. Increased competition could
result in both price reductions and a decline in the supply of nonstandard
RAM components available for recovery by the Company.
Unit sales of peripheral add-on memory products declined slightly in
1995 compared to 1994, but the average memory density per module increased
approximately 56%. Overall average selling prices of peripheral add-on
memory products increased approximately 75% in 1995, due largely to the
increase in the average memory density per module. The increase in
peripheral add on memory product sales in 1994 from 1993 was due to a 45%
increase in units, combined with a 54% increase in average memory density
per module. The Company's peripheral add-on memory product sales benefited
from continued strong industry-wide demand for semiconductor memory
products.
Historically, a substantial portion of the nonstandard RAM components
used in the Company's component recovery and peripheral add-on memory
module operations has been obtained from MTI. Unless the Company is able
to obtain significant quantities of nonstandard RAM components from
alternative sources, the Company's component recovery and peripheral add-on
memory module operations will be limited by the volume of nonstandard RAM
components supplied by MTI. MTI's operating results are favorably affected
by improvements in device yields throughout its semiconductor manufacturing
processes and, accordingly, MTI seeks continuous improvements of such
yields. Significant yield improvements as a consequence of product design
<PAGE>
advances, enhancements of manufacturing processes or other factors have
been experienced by MTI in recent periods and could result in a significant
reduction in the availability or functionality of nonstandard RAM
components from MTI. A significant reduction in the availability or
functionality of nonstandard RAM components from MTI could have a material
adverse effect on the Company's operating results.
Pro Forma Gross Margin
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------------
August 31, 1995 % Change September 1, 1994 % Change September 2, 1993
--------------- -------- ----------------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Pro forma cost of goods sold $983,752 80.1% $546,144 72.0% $317,557
Gross margin percentage 17.6% 16.1% 13.7%
</TABLE>
Pro forma gross margins were $209,578, $104,839 and $50,587 for 1995,
1994 and 1993, respectively. The Company's overall gross margin percentage
was higher in 1995 than in 1994, primarily due to an adjustment of $5.7
million relating to the reduction of certain ZEOS brand PC related
inventories to their net realizable values in March 1994. Absent the
effect of this adjustment, gross margin percentages remained relatively
stable in 1995 from 1994, reflecting the favorable impact of higher gross
margin percentages realized on component recovery sales and peripheral add-
on memory product sales, offset by increased PC sales as a percentage of
total net sales.
Gross margin percentages for PC systems were relatively constant for the
years presented and have historically been, and are likely to continue to
be, lower than the Company's overall gross margin percentages. The Company
continues to experience significant pressure on its gross margin percentage
as a result of intense competition in the PC industry and consumer
expectations of more powerful PC systems at lower prices. Many of the
Company's competitors have substantially greater resources and purchasing
power than the Company. Although the Company has begun to realize some
cost reductions for raw materials following the merger, the Company's
inability to purchase components at prices comparable to those of the
leading PC manufacturers limits the Company's ability to compete on the
basis of price in its PC business without adversely affecting its gross
margin percentage. In the event that sales of PC systems continue to
increase as a percentage of total net sales, the Company's overall gross
margin percentage will be adversely affected.
While overall gross margins on component recovery sales increased in
1995 over 1994, in the fourth quarter of 1995, MTI improved its
semiconductor testing processes, resulting in the shipment of fewer higher
function nonstandard RAM components to MEI for recovery, thus reducing the
average selling price and gross margin percentage on component recovery
sales of product received from MTI. Increased acceptance of nonstandard
RAM components in the market could result in an increase in the sale of
these components by semiconductor manufacturers. In such event, pricing
for such components may decline, which would have an adverse effect on the
gross margins of component recovery sales.
The Company's overall gross margin was higher in 1994 as compared to
1993 due primarily to the decrease, as a percentage of total sales, in
lower margin PC sales.
Pro Forma Selling, General and Administrative Expenses
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------------
August 31, 1995 % Change September 1, 1994 % Change September 2, 1993
--------------- -------- ----------------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Pro forma selling, general
and administrative expenses $ 99,524 60.5% $ 62,005 21.0% $ 51,261
Percent of net sales 8.3% 9.5% 13.9%
</TABLE>
Pro forma selling, general and administrative expenses increased in
absolute dollars but decreased as a percentage of net sales across all
years. The increase in absolute dollars in 1995 was primarily due to
higher levels of personnel costs associated with the expanded PC
operations and, to a lesser extent, increases in advertising costs
and credit card processing fees associated with the increase in
net sales of the Company's PC systems. Goodwill of approximately
$14.6 million was recorded in connection with the
<PAGE>
merger and is being amortized on a straight line basis over three years, or
approximately $4.9 million per year. The increase in absolute dollars in
1994 was primarily due to higher levels of personnel costs.
Pro Forma Income Taxes
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------------
August 31, 1995 % Change September 1, 1994 % Change September 2, 1993
--------------- -------- ----------------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Pro forma income tax
provision (benefit) $ 43,986 167.4% $ 16,447 N/A $ (1,569)
</TABLE>
The Company's pro forma effective tax rate of approximately 40% for all
periods presented reflects primarily the federal statutory income tax rate
and the net effect of state taxes.
Liquidity and Capital Resources
As of August 31, 1995, the Company had cash and equivalents of $69.4
million, representing an increase of $34.4 million compared to September 1,
1994. The increase resulted primarily from cash flows from operations and
$14.1 million of cash acquired in the merger, offset by property, plant and
equipment purchases of $39.6 million related to the expansion of
manufacturing and administrative facilities and the purchase of related
equipment. The significant increase in receivables, inventories, accounts
payable and accrued expenses in 1995 was primarily a result of increased
sales and the merger.
As of August 31, 1995, the Company had $6.7 million in indebtedness
remaining on a ten-year loan from MTI and had no outstanding bank
borrowings. The Company's principal sources of liquidity at August 31,
1995 consisted of cash and equivalents and supplier credit lines. The
Company intends to establish a revolving credit facility with MTI providing
for borrowings of up to $40 million increasing to $80 million, based on
tangible net worth. It is anticipated that the agreement will be secured
by the Company's receivables, inventories and equipment and will be
subordinated to the Company's ten-year loan from MTI. The Company will
likely to also be required to maintain a minimal level of collateral
relative to the borrowings made under the agreement.
At August 31, 1995, the Company had commitments of approximately
$8.1 million for capital expenditures for the continued expansion and
upgrade of existing facilities and equipment.
The Company is required to make guaranteed minimum royalty payments
under certain agreements and periodically enters into minimum purchase
commitments with certain of its suppliers.
The Company expects that its working capital requirements will
continue to increase throughout 1996 and beyond. The Company believes that
currently available cash and equivalents, funds generated from operations
and further expansion of terms with trade creditors will be sufficient to
fund its operations through the end of 1996. However, maintaining an
adequate level of working capital through the end of 1996 and thereafter
will depend in part on the success of the Company's products in the
marketplace, the relative profitability of those products, continued
availability of RAM components at favorable pricing and the Company's
ability to control operating expenses. The Company may seek or require
additional financing for growth opportunities, including any expansion that
the Company may undertake internally, through strategic acquisitions or
partnerships or through expansion of additional sites. There can be no
assurance that any such financing will be available on terms acceptable to
the Company, if at all.
<PAGE>
Certain Factors
The success of the Company will depend to a large extent on its
continuing relationship with MTI, including the continuation of various
favorable business arrangements between MTI and the Company. MTI owns
approximately 80% of the outstanding common stock of the Company. In
addition, four of the eight directors of the Company are directors of MTI,
including Steven R. Appleton, Chairman and Chief Executive Officer of MTI.
MTI has the power to control the outcome of substantially all matters
requiring shareholder approval, including the election of directors and has
the ability to control the management and affairs of the Company. MTI's
equity ownership has the effect of making certain corporate actions
impossible without its support. Because of MTI's significant share
ownership, only a limited percentage of the Company's outstanding common
stock can be traded in the public market unless MTI sells shares into the
public market or otherwise exchanges or transfers a portion of its
ownership. As a result of the relatively limited number of shares that are
publicly traded, sales of substantial amounts of the Company's common stock
in the public market could adversely affect prevailing market prices. In
addition, in the event that MTI is unwilling to allow the reduction of its
percentage of ownership, the combined Company may be unable to complete an
equity financing and could be forced to forego certain other corporate
opportunities.
The Company purchases a substantial portion of the full specification
RAM components used in its operations from MTI on a purchase order basis
with market terms and conditions. It is anticipated that the Company will
continue to purchase full specification RAM components from MTI. A number
of factors could affect MTI's ability or willingness to make full
specification RAM components available to the Company, including a
disruption of MTI's wafer processing, significant yield losses and
strategic and general business considerations. There can be no assurance
that MTI will provide the Company with a sufficient volume of full
specification RAM components to meet customer demand for PC systems,
contract assembly services, peripheral add-on memory products or other
products to be added to the Company's product offering. In the event that
MTI does not provide the Company with an adequate supply of full
specification RAM components in the future, and the Company is unable to
obtain an adequate supply from other sources, the Company's business and
operating results could be materially and adversely affected.
A substantial majority of the Company's nonstandard RAM components is
obtained from MTI. These components are acquired from MTI pursuant to the
Revenue Sharing Agreement which expires in September 1997. Under this
agreement, MTI is required to deliver to the Company all of the nonstandard
RAM components produced at MTI's operations. However, there can be no
assurance that MTI will continue to produce sufficient quantities of
nonstandard RAM components to maintain the Company's component recovery
operation at its existing or historic levels. In this regard, in the
fourth quarter of 1995, MTI improved its semiconductor testing processes
resulting in the shipment of fewer higher function nonstandard RAM
components to MEI for recovery thus reducing the average selling price and
gross margin percentage on component recovery sales of product received
from MTI. The Revenue Sharing Agreement may be amended or modified by
written consent of the Company and MTI. By virtue of MTI's control
position, MTI may be able to dictate future modification of the terms of
agreement. Termination or renegotiation of the key terms of the Revenue
Sharing Agreement could have a material adverse effect on the Company's
operating results.
Fluctuations in the Company's net sales from quarter to quarter and year
to year can be expected and may be attributable to a number of factors,
including without limitation the timing of new product introductions,
seasonal cycles commonly seen in the computer industry, the impact of
product reviews and industry awards, changes in product mix and product
pricing, the timing of orders from and shipments to OEM customers,
fluctuating component costs, critical component availability and industry
competition. As a result, the operating results for any particular period
are not necessarily indicative of the results of any future period.
High volumes of quality components are required for the manufacture
of PC systems. Any industry shortage or other supply constraint of any key
component could affect the Company's ability to ship products on schedule
or at expected gross margins. The Company is unable to purchase components
at costs comparable to those of the leading PC manufacturers. From time to
time, the Company may also experience obsolescence of components in
inventory. Inventory obsolescence results from, among other things, the
fast pace of technological developments in components used in PC systems as
well as the short product life cycles of PC system products. There can be
no assurance that the Company will be able to effectively manage inventory
levels so as to avoid the adverse effects of inventory obsolescence.
Competition in the PC industry is based primarily upon performance,
price, quality, service and support. The PC industry is highly competitive
and has been characterized by intense pricing pressure, rapid technological
advances in hardware and software, frequent introduction of new products
and low gross margin percentages and declining product prices. The Company
must therefore introduce many new products each year and continue to price
its products competitively. Failure by the Company to make specific
<PAGE>
product transitions or to accurately forecast its market demand for product
mix may adversely affect the Company's results of operations.
The Company's contract manufacturing customers generally require short
delivery cycles and quick turnaround for contract manufacturing services.
As the Company's OEM customers react to variations in demand for their
product and adjust their purchase orders to the Company, the Company is
exposed to the risk of being subject to noncancelable purchase orders with
its suppliers and to inventory risk for raw materials, work in process and
finished goods. OEM order fluctuations and deferrals have had an adverse
effect on the Company's contract manufacturing operations in the past and
there can be no assurance that the Company will not experience such adverse
effects in the future. The Company's contract manufacturing operations
rely on sales to a relatively limited number of customers. The Company has
no long term agreements with any of its contract manufacturing customers,
including MTI, which require such customers to purchase contract
manufacturing services from the Company. Should any of the Company's key
contract manufacturing customers reduce in any material respect their
purchases of the Company's contract manufacturing services, there can be no
assurance that the Company could obtain alternative business on a timely
basis, which could have a material adverse effect on the Company's business
and operating results.
It is common in the PC industry for certain companies to assert
patent and copyright infringement claims, as well as other intellectual
property rights claims, against other companies, including component
suppliers and PC manufacturers. Periodically, MEI is made aware that the
technology used by MEI may infringe on product or process technology rights
held by others. MEI has accrued a liability and charged operations for the
estimated costs of settlement or adjudication of these asserted claims for
alleged infringement and other unasserted claims arising prior to the
balance sheet date. MEI would be placed at a disadvantage if its
competitors were to obtain licenses with lower royalty fee payments or
other terms more favorable than those received by the Company. The Company
has entered into several patent and software license agreements with third
parties, some of which expire within the next year and all of which require
one-time or periodic royalty payments. The Company is unable to predict
whether these license agreements can be obtained or renewed on terms
acceptable to the Company. If the Company or its suppliers were unable to
obtain licenses necessary to use the protected technology in their
products, the Company may be forced to market products without certain
technological features. MEI could also incur substantial costs to defend
legal actions taken against it relating to patent or copyright protected
technology. The inability to obtain licenses necessary to use certain
technology or its inability to obtain such licenses on competitive terms,
or a finding of infringement against the Company, could have a material
adverse effect on the Company.
Several states have enacted legislation which would require out-of-
state direct marketers to collect and remit sales and use taxes based on
certain limited contacts with the state. Taxation authorities in certain
states have solicited information from time to time from the Company to
determine whether the Company has sufficient contacts with such states as
would require payment and collection and remittance of sales and use taxes
in those states. In the event that the Company is required to pay or
collect and remit sales and use taxes in states where the Company is not
currently paying or collecting and remitting such taxes, the future
operating results and financial condition of the Company could be
materially and adversely affected.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements:
Statements of Operations for Fiscal Years Ended August 31, 1995, 26
September 1, 1994 and September 2, 1993
Balance Sheets as of August 31, 1995 and September 1, 1994 27
Statements of Shareholders' Equity for Fiscal Years Ended 28
August 31, 1995, September 1, 1994 and September 2, 1993
Statements of Cash Flows for Fiscal Years Ended August 31, 1995, 30
September 1, 1994 and September 2, 1993
Notes to Financial Statements 31
Report of Independent Accountants 41
Financial Statement Schedules:
Schedule VIII. Valuation and Qualifying Accounts for Fiscal 45
Years Ended August 31, 1995, September 1, 1994 and
September 2, 1993.
</TABLE>
<PAGE>
Micron Electronics, Inc.
Statements of Operations
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
August 31, September 1, September 2,
Fiscal year ended 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $999,999 $412,938 $162,180
Cost of goods sold 816,662 326,643 129,845
-------- -------- --------
Gross margin 183,337 86,295 32,335
Selling, general and administrative 74,951 25,883 10,317
Research and development 1,893 561 396
-------- -------- --------
Operating income 106,493 59,851 21,622
Interest income (expense), net 1,983 546 (28)
-------- -------- --------
Income before income taxes 108,476 60,397 21,594
Income tax provision 43,390 23,499 7,971
-------- -------- --------
Net income $ 65,086 $ 36,898 $ 13,623
======== ======== ========
Earnings per share $ 0.74 $ 0.45 $ 0.17
Number of shares used in per
share calculations 87,422 81,523 78,076
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Micron Electronics, Inc.
Balance Sheets
(Dollars in thousands, except par value amounts)
<TABLE>
<CAPTION>
August 31, September 1,
Fiscal year ended 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and equivalents $ 69,406 $ 35,048
Liquid investments - 2,181
Receivables 128,744 50,797
Inventories 92,709 31,110
Deferred income taxes 16,086 1,156
Other current assets
1,810 588
--------- ---------
Total current assets 308,755 120,880
Property, plant and equipment, net 58,254 30,746
Goodwill, net 12,612 -
Other assets
3,095 113
--------- ---------
Total assets $ 382,716 $ 151,739
========= =========
Liabilities and shareholders' equity
Accounts payable and accrued expenses $177,437 $ 72,290
Accrued licenses and royalties 23,844 1,661
Current portion of long-term debt 1,022 1,023
--------- ---------
Total current liabilities 202,303 74,974
--------- ---------
Long-term debt 5,801 6,822
Deferred income taxes - 1,056
Other liabilities 949 718
Total liabilities 209,053 83,570
Commitments and contingencies
Common stock:
MCI Class A, no par value, authorized
7,900,000 shares,issued and outstanding
988,000 shares - 79
MCI Class B, no par value, authorized
2,100,000 shares, issued and outstanding
470,000 shares - 286
MCMS, $0.10 par value, authorized
10,000,000 shares, issued and outstanding
1,849,000 shares - 185
MEI, $0.01 par value, authorized
150,000,000 shares, issued and outstanding
91,431,000 shares 914 -
Additional paid-in capital 58,613 14,662
Retained earnings 114,136 52,957
--------- ---------
Total shareholders' equity 173,663 68,169
--------- ---------
Total liabilities and shareholders' equity $ 382,716 $ 151,739
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Micron Electronics, Inc.
Statements of Shareholders' Equity
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------------------Additional Total
MEI MCI Class A MCI Class B MCMS Paid-in Retained Shareholders'
Shares Amount Shares Amount Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------ ------ ------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 3, 1992 40 $79 16 $53 9 $1 $10,625 $ 2,437 $ 13,195
Stock sold - - 4 70 - - - -
Stock split 158 - 64 - - - - -
Purchase and retirement
of stock - - - (35) - - - -
Tax effect of stock
purchase plans - - - - - - 21 -
Net income - - - - - - - 13,623
------ ------ ------ ------ ------ ------ ------- -------- --------
Balance at
September 2, 1993 198 79 84 88 9 1 10,646 16,060 $26,874
Stock sold - - 45 221 258 26 4,001 -
Stock split 790 - 341 - 1,582 158 (158) -
Purchase and retirement
of stock - - - (23) - - - (1)
Tax effect of stock
purchase plans - - - - - - 173 -
Net income - - - - - - - 36,898
------ ------ ------ ------ ------ ------ ------- -------- --------
Balance at
September 1, 1994 988 79 470 286 1,849 185 14,662 52,957 $68,169
Stock sold 84 $1 - - 7 67 - - 330 -
Purchase and retirement
of stock (16) - (16) (1) (90) (55) - - (11) (824)
Stock option plan - - - - - - - - 134 -
Tax effect of stock
purchase plans - - - - - - - - 710 -
Net income - - - - - - - - - 65,086
Merger transaction 91,363 913 (972) (78) (387) (298) (1,849) (185) 42,788 (3,083)
------ ------ ------ ------ ------ ------ ------ ------ ------- -------- --------
Balance at
August 31, 1995 91,431 $ 914 - $ - - $ - - $ - $58,613 $114,136 $173,663
====== ====== ====== ====== ====== ====== ====== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Micron Electronics, Inc.
Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
August 31, September 1, September 2,
Fiscal year ended 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 65,086 $ 36,898 $ 13,623
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 11,057 4,635 2,682
Amortization 2,101 31 7
Change in assets and liabilities,
net of effects of merger
transaction:
Increase in receivables (56,049) (29,490) (12,722)
Increase in inventories (34,052) (16,711) (9,179)
Increase in accounts
payable and accrued expenses 61,666 36,336 19,624
Increase in accrued licenses
and royalties 14,411 568 592
Decrease in deferred income
taxes (3,634) (794) (38)
Other (231) 54 101
-------- -------- --------
Net cash provided by operating
activities 60,355 31,527 14,690
-------- -------- --------
Cash flows from investing activities
Property, plant and equipment
expenditures (39,585) (19,260) (5,012)
Proceeds from sale of equipment 528 787 209
Purchase of held-to-maturity
investments (3,165) (2,164) -
Proceeds from maturity of investments 5,400 - -
Cash acquired in merger transaction 14,060 - -
Other (439) (63) (6)
-------- -------- --------
Net cash used for investing
activities (23,201) (20,700) (4,809)
-------- -------- --------
Cash flows from financing activities
Repayments of debt (1,022) (1,669) (1,397)
Proceeds from issuance of common
stock 398 4,248 70
Purchase and retirement of stock (891) (24) (35)
Other (1,281) (18) -
-------- -------- --------
Net cash provided by (used for)
financing activities (2,796) 2,537 (1,362)
-------- -------- --------
Net increase in cash and equivalents 34,358 13,364 8,519
Cash and equivalents at beginning of
year 35,048 21,684 13,165
-------- -------- --------
Cash and equivalents at end of year $ 69,406 $ 35,048 $ 21,684
======== ======== ========
Supplemental disclosures
Income taxes paid to Parent $(45,277) $(21,889) $ (5,816)
Interest paid, net of amounts
capitalized (412) (416) (584)
Noncash investing and financing
activities:
Assets acquired in merger
transaction net of cash and
assumed liabilities 25,998 - -
Assets acquired in exchange for
debt - 1,468 11
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements
(Tabular dollar amounts in thousands, except per share amounts)
Significant Accounting Policies
Basis of presentation: The financial statements include the accounts of
Micron Electronics, Inc. ("MEI" or the "Company") and its wholly-owned
subsidiaries. MEI manufactures electronic products for a wide range of
computing and digital applications. The Company develops, markets,
manufactures, sells and supports personal computer systems for consumer,
government and business use, provides contract manufacturing services to
original equipment manufacturers, maintains a component recovery operation
and assembles and markets peripheral add-on memory products. All
significant intercompany accounts and transactions have been eliminated.
The Company's fiscal year is the 52 or 53 week period ending on the
Thursday closest to August 31. As of August 31, 1995, the Company was
approximately 80% owned by Micron Technology, Inc. ("MTI" or "Parent").
Revenue recognition: Revenue from product sales to direct customers is
recognized upon shipment. A provision for estimated sales returns is
recorded in the period in which the sales are recognized. The Company
defers recognition of sales to distributors with return privileges until
the distributors have sold the products.
Earnings per share: Earnings per share is computed using the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares result from the assumed exercise of outstanding stock
options and affect earnings per share when they have a dilutive effect.
All historical per share amounts have been restated to reflect stock splits
and the effect of the merger transaction (see "The Merger").
Financial instruments: Cash equivalents include highly liquid short-term
investments with original maturities of three months or less, readily
convertible to known amounts of cash. The amounts reported as cash
equivalents, liquid investments, receivables, other assets, accounts
payable and accrued expenses and long-term debt are considered to be
reasonable approximations of their fair values. The fair value estimates
presented herein were based on market information available to management
as of August 31, 1995. The use of different market assumptions and
estimation methodologies could have a material effect on the estimated fair
value amounts. The reported fair values do not take into consideration
potential taxes or other expenses that would be incurred in an actual
settlement.
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and equivalents, liquid
investments and trade accounts receivable. The Company invests its cash in
credit instruments of highly rated financial institutions and performs
periodic evaluations of the relative credit standing of these financial
institutions. The Company, by policy, limits the concentration of credit
exposure by restricting investments with any single obligor, instrument, or
geographic area. A concentration of credit risk may exist with respect to
trade receivables, as substantially all customers are affiliated with the
computer, telecommunications and office automation industries. The Company
has a large number of customers on which it performs ongoing credit
evaluations and generally does not require collateral from its customers.
Historically, the Company has not experienced significant losses related to
receivables for individual customers or groups of customers in any
particular industry or geographic area.
Inventories: Inventories are stated at the lower of average cost or market.
Property, plant and equipment: Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of 5 to 30 years for buildings and 2 to 5 years for
equipment.
Product and process technology: Costs related to the conceptual formulation
and design of products and processes are expensed as research and
development. Costs incurred to establish patents and acquire product and
process technology are capitalized. Capitalized costs are amortized using
the straight-line method over the shorter of the estimated useful life of
the technology, the patent term, or the agreement, ranging up to 10 years.
Royalties: The Company has royalty-bearing license agreements that allow
it to sell certain hardware and software. Royalty costs are accrued and
included in cost of goods sold when the sale is recognized.
<PAGE>
The Merger
On April 7, 1995, Micron Computer, Inc. ("MCI") and Micron Custom
Manufacturing Services, Inc. ("MCMS"), subsidiaries of MTI, merged with and
into ZEOS International, Ltd. ("ZEOS"). Pursuant to the terms of the
merger, ZEOS issued approximately 82.5 million shares of its common stock
in exchange for all of the outstanding shares of MCI and MCMS and the name
of the surviving corporation was changed to Micron Electronics, Inc. The
merger resulted in a change of control of approximately 89% of ZEOS
wherein, assuming exercise of all outstanding options, (a) MTI owns an
approximate 79% interest in ZEOS, and (b) the other shareholders of MCI and
MCMS own an approximate 10% interest in ZEOS. The merger has been
accounted for as a purchase of ZEOS by MCI and MCMS. A new basis of
accounting was established for the assets and liabilities of ZEOS to the
extent of the change of control. The new basis reflects the allocation of
the approximate $39,136,000 increased basis to the ZEOS assets and
liabilities on the basis of their fair values. Goodwill of approximately
$14,574,000 was recorded to the extent the purchase price exceeded the fair
value of the identifiable net assets for which a change of control
occurred. Goodwill is amortized on a straight line basis over three years.
Accumulated goodwill amortization as of August 31, 1995 was $1,962,000.
The Company's fiscal year is a 52 or 53 week period ending on the Thursday
closest to August 31, which is the fiscal year of the Micron entities.
Subsequent to the merger, the financial statements of the Company reflect
the combined results of operations, financial position and cash flows of
ZEOS, MCI and MCMS based on the new basis of accounting for ZEOS and the
historical cost basis of MCI and MCMS. Prior to April 7, 1995, the
financial statements of the Company include only the combined results of
operations, financial position and cash flows of MCI and MCMS.
The following unaudited pro forma financial information presents the results of
operations of the Company for the years ended August 31, 1995 and September
1, 1994, as if the merger had occurred at the beginning of the periods,
after giving effect to pro forma adjustments, including amortization of
goodwill, certain product and process technology costs and related income
tax effects:
<TABLE>
<CAPTION>
Year ended August 31, 1995 September 1, 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,193,330 $650,983
Gross margin 209,578 104,839
Net income 65,980 25,191
Earnings per share 0.71 0.28
The pro forma financial information is provided for illustrative purposes
and is not necessarily indicative of the combined results of operations
that would have actually occurred for such periods nor does it represent a
forecast of results of operations for any future periods.
<PAGE>
Investments
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", as of September 1, 1994. Under SFAS No. 115, securities
classified as held-to-maturity are stated at amortized cost.
</TABLE>
<TABLE>
<CAPTION>
August 31, 1995 September 1, 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Held-to-maturity securities:
Commercial paper $ 19,421 $ 10,338
State and local government 12,050 8,850
Bankers' acceptances 5,966 5,976
Certificate of deposit 1,030 -
U.S. Government agency 1,000 -
-------- --------
39,467 25,164
Less cash equivalents (39,467) (22,983)
-------- --------
Liquid investments $ - $ 2,181
======== ========
</TABLE>
Securities classified as held-to-maturity have remaining maturities within
one year.
Receivables
<TABLE>
<CAPTION>
August 31, 1995 September 1, 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $126,040 $ 48,818
Receivables from affiliates 8,379 2,866
Other 1,070 1,507
Allowance for doubtful accounts (5,458) (1,460)
Allowance for returns and discounts (1,287) (934)
-------- --------
$128,744 $ 50,797
======== ========
</TABLE>
Inventories
<TABLE>
<CAPTION>
August 31, 1995 September 1, 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 75,045 $ 23,825
Work in progress 13,951 4,333
Finished goods 14,299 3,494
Allowance for inventories (10,586) (542)
-------- --------
$ 92,709 $ 31,110
======== ========
</TABLE>
<PAGE>
Property, Plant and Equipment
<TABLE>
<CAPTION>
August 31, 1995 September 1, 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Land $ 987 $ 987
Buildings 15,643 9,202
Equipment 71,502 33,024
Construction in progress 7,259 3,161
-------- --------
95,391 46,374
Less accumulated depreciation and
amortization (37,137) (15,628)
-------- --------
$ 58,254 $ 30,746
======== ========
</TABLE>
In December 1993, the Company exchanged approximately 13 acres of land
owned by the Company for 13 acres of land owned by a director.
Additionally, the Company purchased approximately 17 acres of land for
$258,000 and obtained an option to purchase approximately 40 additional
acres of real property adjacent to its Nampa facility from this director.
Accounts Payable and Accrued Expenses
<TABLE>
<CAPTION>
August 31, 1995 September 1, 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $ 99,065 $ 32,474
Payable to affiliates 53,750 23,433
Salaries, wages and benefits 11,086 3,646
Income taxes payable to Parent 4,686 4,428
Other 8,850 8,309
-------- --------
$177,437 $ 72,290
======== ========
</TABLE>
<PAGE>
Long-Term Debt
<TABLE>
<CAPTION>
August 31, 1995 September 1, 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Notes payable to Parent in quarterly
installments through March 2002,
variable interest rates of 7.56% and
6.13%, respectively $ 6,672 $ 7,660
Capital lease obligations payable in
monthly installments through May 1999,
weighted average interest rate 8.0% 151 185
-------- --------
6,823 7,845
Less current portion (1,022) (1,023)
-------- --------
$ 5,801 $ 6,822
======== ========
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Fiscal year Notes payable Capital leases
- --------------------------------------------------------------------------
<S> <C> <C>
1996 $ 988 $ 44
1997 988 44
1998 988 44
1999 988 44
2000 988 -
2001 and thereafter 1,732 -
Less discount and interest - (25)
-------- --------
$ 6,672 $ 151
======== ========
</TABLE>
The notes payable to Parent are collateralized by certain tangible assets
of the Company.
Interest income is net of $426,000 and $430,000 of interest expense in 1995
and 1994, respectively. Interest expense is net of $520,000 of interest
income in 1993. Construction period interest of $119,000, $34,000 and
$12,000 was capitalized in 1995, 1994 and 1993, respectively.
<PAGE>
Stock Purchase and Incentive Plans
The Company's 1995 Stock Option Plan provides for the granting of incentive
and nonstatutory stock options. As of August 31, 1995, there were 5,000,000
shares of common stock reserved for issuance under the plan. Exercise
prices of the incentive and nonstatutory stock options have been 100% and
85%, respectively, of the fair market value of the Company's common stock
on the date of grant. Options are granted subject to the terms and
conditions established by the plan and the Board of Directors, and
generally are exercisable in increments of 20% each year subject to
continued employment with the Company. Options generally expire six years
from the date of grant. During 1995, options to purchase 747,000 shares
were granted at per share prices ranging from $15.92 to $18.73. Options to
purchase 746,000 shares were outstanding at August 31, 1995. No options to
purchase stock under the 1995 Stock Option Plan were exercisable at August
31, 1995.
The Company's 1995 Employee Stock Purchase Plan allows eligible employees
of the Company to purchase shares of common stock through payroll
deductions. The shares can be purchased at a price equal to 85% of the
lower of the beginning or ending fair market value of each six month
offering period. Shares purchased under the plan are restricted from
resale for a period of one year from the date of purchase. Purchases are
limited to 20% of an employee's eligible compensation. A total of 2,500,000
shares are reserved for issuance under the plan. There had been no stock
issuances under the plan as of August 31, 1995.
Granting of options under ZEOS' stock option plan was suspended after the
merger. During 1995, subsequent to the merger, options to purchase 84,000
shares were exercised at per share prices ranging from $2.63 to $8.50. At
August 31, 1995, options to purchase 1,049,000 shares were outstanding
under this plan of which 921,000 options were exercisable at per share
prices ranging from $0.33 to $17.00.
Prior to the merger, 7,000, 35,000 and 7,000 shares of MCI Class B no par
value Common Stock were issued under MCI's Stock Purchase Plan, at per
share prices ranging from $6.63 to $10.35, $2.80 to $8.24 and $0.61 to
$2.80 in 1995, 1994 and 1993, respectively. Grants of options to purchase
stock under this plan were suspended subsequent to the merger.
Prior to the merger, 258,000 shares of MCMS $0.10 par value Common Stock
were issued under the MCMS Stock Purchase Plan, at per share prices ranging
from $14.97 to $19.10. Issuances of stock under this plan were suspended
subsequent to the merger.
In December 1994, ZEOS awarded shares of its common stock to certain of its
employees subject to their continued employment as of January 1, 1996.
Compensation expense is recognized over the vesting period based upon the
fair market value of the stock at the date of award. At August 31, 1995,
153,422 shares remain reserved for this award.
Employee Savings Plan
The Company has two 401(k) profit-sharing plans, the RAM Plan and the ZEOS
Plan, in which employees participate. Under the RAM Plan, which is
administered by MTI, employees may contribute from 2 to 16 percent of their
eligible pay to various savings alternatives. In 1994, the RAM Plan was
modified to provide for an annual match by the Company of the first $1,500
of eligible employee contributions and for additional contributions by the
Company based on the Company's financial performance.
Under the ZEOS Plan, employees may contribute from 1 to 20 percent of their
eligible pay to various savings alternatives. 200% of the first 1% of non-
exempt employees' compensation contributed to the ZEOS Plan was matched by
the Company at its discretion. Effective September 1, 1995, the ZEOS Plan
was amended to match the provisions of the RAM Plan.
The Company's expense pursuant to these plans was $1,062,000, $450,000 and
$159,000 in 1995, 1994 and 1993, respectively.
<PAGE>
Transactions with Affiliates
<TABLE>
<CAPTION>
August 31, September 1, September 2,
1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 32,417 $ 14,703 $ 16,604
Inventory purchases 177,402 82,094 40,148
Revenue sharing and product and
process technology expenses 72,889 42,655 12,022
Administrative services expenses 917 554 396
Property, plant and equipment
purchases 5,647 2,805 866
Property, plant and equipment sales - 506 148
Construction management services 872 4,668 14
</TABLE>
Revenue sharing expense is a component of cost of goods sold and reflects
amounts paid under a revenue sharing agreement, which expires in September
1997, wherein, for the nonstandard semiconductor components recovered from
MTI, the Company currently pays MTI an amount equal to one-half of net
sales to third parties and one-half of the transfer price for products
identified for internal use by the Company.
Commitments
As of August 31, 1995, the Company had commitments of $5,230,000 for
equipment purchases and $2,885,000 for the construction of buildings. In
addition, the Company is required to make guaranteed minimum royalty
payments under certain agreements and periodically enters into minimum
purchase commitments with certain suppliers.
The Company leases all office and production facilities in Minnesota and
North Carolina, and certain other property and equipment, under operating
lease agreements expiring through 2005, with renewals thereafter at the
option of the Company. Future minimum lease payments as of August 31,
1995, are as follows:
<TABLE>
<CAPTION>
Fiscal year
- -------------------------------------------------------------
<S> <C>
1996 $ 982
1997 467
1998 254
1999 226
2000 192
2001 and thereafter 656
</TABLE>
Rental expense was $1,026,000, $277,000 and $73,000 in 1995, 1994 and 1993,
respectively.
Income Taxes
The Company is included in the consolidated tax return of its Parent. The
tax provision is computed as if the Company were a separate taxpayer.
Effective the first day of fiscal 1994, the Company adopted SFAS No. 109,
"Accounting for Income Taxes." Adoption of SFAS No. 109 did not have a
material effect on the Company's financial position or result of
operations.
<PAGE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
August 31, September 1, September 2,
1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $ 38,548 $ 19,586 $ 7,149
State 7,691 4,378 994
-------- -------- --------
46,239 23,964 8,143
-------- -------- --------
Deferred:
U.S. federal (570) (83) (476)
State (2,279) (382) 304
-------- -------- --------
(2,849) (465) (172)
-------- -------- --------
Income tax provision $ 43,390 $ 23,499 $ 7,971
======== ======== ========
</TABLE>
The tax benefit associated with disqualifying dispositions by employees of
shares issued in the Parent's stock purchase plans reduced taxes payable by
$710,000, $173,000 and $21,000 for 1995, 1994 and 1993, respectively. Such
benefits are credited to additional paid-in capital.
A reconciliation between the income tax provision and income tax computed
using the federal statutory rates follows:
<TABLE>
<CAPTION>
August 31, September 1, September 2,
1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal income tax at statutory
rate $ 37,967 $ 21,140 $ 7,459
State taxes, net of federal benefit 4,592 2,664 978
Other 831 (305) (466)
-------- -------- --------
Income tax provision $ 43,390 $ 23,499 $ 7,971
======== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes at enacted tax rates.
Deferred income tax assets totaled $22,360,000 and $3,345,000 and
liabilities totaled $4,164,000 and $3,244,000 at August 31, 1995 and
September 1, 1994, respectively. The approximate tax effect of temporary
differences and carryforwards which give rise to the net deferred tax asset
are as follows:
<TABLE>
<CAPTION>
August 31, September 1,
1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Current deferred tax asset:
Receivables $ 2,161 $ 776
Inventories 4,462 284
Accrued licenses and royalties 4,029 -
Net operating loss carryforward 2,828 -
Other 2,606 96
-------- --------
Net deferred tax asset 16,086 1,156
-------- --------
Noncurrent deferred tax asset
(liability):
Property, plant and equipment (1,298) (1,310)
Net operating loss carryforward 2,954 -
Other 454 254
-------- --------
Net deferred tax asset
(liability) 2,110 (1,056)
-------- --------
Total net deferred tax asset $ 18,196 $ 100
======== ========
</TABLE>
Deferred tax assets of $15,247,000 were recorded in 1995 in connection with
the merger transaction. Net operating loss carryforwards of $14,623,000,
available to offset future taxable income, will begin to expire in 2006.
<PAGE>
Export Sales
Export sales were $76,686,000, $25,957,000 and $12,407,000 in 1995, 1994
and 1993, respectively.
Contingencies
Periodically, MEI is made aware that the technology used by MEI may
infringe on product or process technology rights held by others. MEI has
accrued a liability and charged operations for the estimated costs of
settlement or adjudication of these asserted claims for alleged
infringement and other unasserted claims arising prior to the balance sheet
date. The ultimate resolution of these claims is not expected to have a
material effect on the results of operations or financial position of the
Company.
The Company is currently a party to various other legal actions arising out
of the normal course of business, none of which are expected to have a
material effect on the Company's financial position or results of
operations.
<PAGE>
Quarterly Financial Information (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Net sales $403,968 $271,477 $190,225 $134,329
Gross margin 64,038 49,782 40,493 29,024
Net income 20,957 15,605 16,918 11,606
Earnings per share 0.23 0.17 0.20 0.14
1994
Net sales $134,304 $106,249 $ 96,729 $ 75,656
Gross margin 28,136 22,755 19,166 16,238
Net income 11,771 9,497 8,477 7,153
Earnings per share 0.14 0.11 0.11 0.09
</TABLE>
<PAGE>
Report of Independent Accountants
The Shareholders and Board of Directors
Micron Electronics, Inc.
We have audited the financial statements and financial statement schedule
of Micron Electronics, Inc. and subsidiaries, listed in the index on page
25 of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Micron Electronics,
Inc., and subsidiaries, as of August 31, 1995 and September 1, 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended August 31, 1995, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all
material respects, the financial information required to be included
therein.
Coopers & Lybrand L.L.P.
Boise, Idaho
September 21, 1995
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Ernst & Young LLP served as the independent accountants for ZEOS
International, Ltd. ("ZEOS") prior to its merger with Micron Computer, Inc.
("MCI") and Micron Custom Manufacturing Services, Inc. ("MCMS") on April 7,
1995. Coopers & Lybrand L.L.P. has served as Micron Technology, Inc.'s
("MTI") independent accountants, and has audited the financial statements
of both MCI and MCMS for three preceding fiscal years. Because of Coopers
& Lybrand L.L.P.'s familiarity with the business and operations of MCI,
MCMS and MTI, the Company engaged Coopers & Lybrand L.L.P. as the auditors
of the combined Company following the merger.
As previously reported in its Form 8-K, dated April 7, 1995, the Company
dismissed Ernst & Young LLP as its independent accountants on April 7,
1995. The reports of Ernst & Young LLP on the financial statements of ZEOS
for each of the past two fiscal years (1994 and 1993) contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle. The decision to change
independent accountants was approved by the Registrant's Board of
Directors, including the members of the Audit Committee. During ZEOS' two
most recent fiscal years and through the date of the merger, ZEOS had no
reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).
The Company engaged Coopers & Lybrand L.L.P. as its independent accountants
as of April 7, 1995. During the two most recent fiscal years and through
the date of this report, ZEOS did not consult with Coopers & Lybrand L.L.P.
on either (1) the application of accounting principles to a specified
transaction or the type of opinion that might be rendered on ZEOS'
financial statements, or (2) items which concerned the subject matter of a
disagreement or reportable event with the former auditor (as described in
Item 304(a)(2) Regulation S-K).
PART III
Item 10. Directors and Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Parties
Certain information concerning the Registrant's executive officers is
included under the caption "Executive Officers and Directors of the
Registrant" following Part I, Item 1 of this report. Information required
by Items 10, 11, 12 and 13 will be contained in the Proxy Statement which
will be filed with the Securities and Exchange Commission within 120 days
after August 31, 1995, and is incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports On Form 8-K
(a) The following documents are filed as part of this report:
Financial statements and financial statement schedules -- see
"Item 8. Financial Statements and Supplementary Data".
Exhibit Description
------- -------------------------------------------------------------
2.1 Agreement of Merger, dated as of October 30, 1994, as amended
by the first amendment thereto, dated as of December 13,
1994, by and among ZEOS, MCI and MCMS. (1)
2.2 Articles of Merger, dated April 7, 1995, by and among ZEOS,
MCI and MCMS. (2)
3.1 Articles of Incorporation of Registrant, as amended. (3)
3.2 Bylaws of the Registrant. (4)
10.32 Voting Agreement, dated October 30, 1994, between ZEOS and
Micron Technology, Inc. (1)
10.33 Component Recovery Revenue Sharing Agreement, dated as of
July 14, 1994, between MCMS and Micron Technology, Inc. (3)
10.34 Amended and Restated Promissory Note, dated September 3,
1992, between MCMS and Micron Technology, Inc. (3)
10.35 1995 Stock Option Plan. (5)
10.36 1995 Employee Stock Purchase Plan. (5)
10.37 Executive Bonus Plan. (5)
10.38 Form of Indemnification Agreement between the Registrant and
its officers and directors.
10.39 Form of Termination Agreement for officers of the Company.
11 Computation of per share earnings.
16 Letter from Ernst & Young LLP, dated April 11, 1995. (2)
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
- --------------------------------------------------------------------------
(1) Incorporated by reference to Registration Statement on Form S-4
(File No. 33-90212), as declared effective on March 13, 1995.
(2) Incorporated by reference to Current Report on Form 8-K, dated
April 7, 1995.
(3) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended April 1, 1995.
(4) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1992.
(5) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended June 1, 1995.
(b) Reports on Form 8-K:
On August 17, 1995, the Company filed a Report on Form 8-K which
announced (1) the resignation of Gregory E. Herrick as a director and as
Executive Vice President, Sales and Marketing, (2) the appointment of
Gregory D. Stevenson as a director and as Executive Vice President,
Operations, (3) the appointment of Brian C. Klene as Executive Vice
President, Sales and Marketing, and (4) the appointment of Pete J.
Scamardo, Jr., as Vice President, Product Marketing.
On September 15, 1995, the Company filed a report on Form 8-K which
announced the resignation of Chase S. Mart as a director and as Executive
Vice President, Business Development.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Nampa, State of Idaho, on the 9th day of October, 1995.
MICRON ELECTRONICS, INC.
By/s/ T. Erik Oaas
--------------------------------------
T. Erik Oaas, Vice President, Finance,
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------ -------------------------------- ---------------
/s/ Joseph M. Daltoso Chairman of the Board, President October 9, 1995
- ------------------------ and Chief Executive Officer
(Joseph M. Daltoso) (Principal Executive Officer)
/s/ T. Erik Oaas Vice President, Finance, and October 9, 1995
- ------------------------ Chief Financial Officer
(T. Erik Oaas) (Principal Financial and
Accounting Officer), Director
/s/ Gregory D. Stevenson Executive Vice President, October 9, 1995
- ------------------------ Operations, Director
(Gregory D. Stevenson)
/s/ Robert F. Subia Director; Chairman, President October 9, 1995
- ------------------------ and Chief Executive Officer of
(Robert F. Subia) Micron Custom Manufacturing
Services, Inc.
/s/ Steven R. Appleton Director October 9, 1995
- ------------------------
(Steven R. Appleton)
/s/ Jerry M. Hess Director October 9, 1995
- ------------------------
(Jerry M. Hess)
/s/ Robert A. Lothrop Director October 9, 1995
- ------------------------
(Robert A. Lothrop)
/s/ John R. Simplot Director October 9, 1995
- ------------------------
(John R. Simplot)
<PAGE>
Micron Electronics, Inc.
Schedule VIII
Valuation and Qualifying Accounts
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal year ended 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for doubtful accounts
Balance at beginning of year $ 1,460 $ 463 $ 124
Additions charged to expense 3,962 2,344 440
Reductions and write-offs (1,540) (1,347) (101)
Merger transaction 1,576 - -
-------- -------- --------
Balance at end of year $ 5,458 $ 1,460 $ 463
======== ======== ========
Allowance for inventories
Balance at beginning of year $ 542 $ 469 $ 145
Additions charged to expense 5,913 310 388
Reductions and write-offs (4,278) (237) (64)
Merger transaction 8,409 - -
-------- -------- --------
Balance at end of year $ 10,586 $ 542 $ 469
======== ======== ========
</TABLE>
Micron Electronics, Inc.
Exhibit 11.1
Computation of Per Share Earnings
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
August 31, September 1, September 2,
Fiscal year ended 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Primary
Weighted average shares outstanding 86,959 81,427 78,014
Net effect of dilutive stock options
and warrants 463 96 62
-------- -------- --------
Total 87,422 81,523 78,076
======== ======== ========
Net income $ 65,086 $ 36,898 $ 13,623
======== ======== ========
Per share amount $ 0.74 $ 0.45 $ 0.17
======== ======== ========
Fully Diluted
Weighted average shares outstanding 86,959 81,427 78,014
Net effect of dilutive stock options
and warrants 469 98 63
-------- -------- --------
Total 87,428 81,525 78,077
======== ======== ========
Net income $ 65,086 $ 36,898 $ 13,623
======== ======== ========
Per share amount $ 0.74 $ 0.45 $ 0.17
======== ======== ========
</TABLE>
Micron Electronics, Inc.
Exhibit 21.1
Subsidiaries of the Registrant
State (or
jurisdiction) Percentage
in which Ownership
Name incorporated by Registrant
- ------------------------------- ------------- -------------
Micron Custom Manufacturing Idaho 100%
Services, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the accompanying financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<CASH> 69,406
<SECURITIES> 0
<RECEIVABLES> 135,489
<ALLOWANCES> 6,745
<INVENTORY> 92,709
<CURRENT-ASSETS> 308,755
<PP&E> 95,391
<DEPRECIATION> 37,137
<TOTAL-ASSETS> 382,716
<CURRENT-LIABILITIES> 202,303
<BONDS> 0
<COMMON> 914
0
0
<OTHER-SE> 172,749
<TOTAL-LIABILITY-AND-EQUITY> 382,716
<SALES> 999,999
<TOTAL-REVENUES> 999,999
<CGS> 816,662
<TOTAL-COSTS> 889,544
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,962
<INTEREST-EXPENSE> (1,983)
<INCOME-PRETAX> 108,476
<INCOME-TAX> 43,390
<INCOME-CONTINUING> 65,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,086
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
